LTC Bullet: Long-Term Care’s Fundamental Fallacy

Friday, February 18, 2022

Seattle—

LTC Comment: We explain the fundamental fallacy that leads LTC analysts and policy makers astray after the ***news.*** [mostly omitted]

LTC BULLET: LONG-TERM CARE’S FUNDAMENTAL FALLACY

LTC Comment: Many recent articles and reports insist that America needs a new, compulsory, payroll-funded social insurance program for long-term care. These proposals follow decades of similar studies and recommendations. They persist despite the universal failure of such initiatives from the Pepper Commission in 1990 through the CLASS Act of 2010 and the WA Cares Fund’s collapse this year. What drives the advocates of socialized long-term care? What keeps them trying in spite of universal rejection by voters? What underlies their persistence?

I think the answer is the social insurance advocates’ unquestioning acceptance of a fundamental fallacy about long-term care. My 1990 Gerontologist article titled “The Fallacy of Impoverishment” explained that misconception and provided evidence of the damage it causes. But to this day the same fallacy prevails among long-term care scholars and the politicians they influence. Today’s LTC Bullet briefly summarizes the fallacy of impoverishment and provides an example of how it misguides well-intentioned analysts who sincerely want to fix what ails America’s long-term care system.

The fallacy of impoverishment is the idea that people must be poor to the point of destitution before they qualify for government-financed long-term care. That idea prevails because Medicaid law and regulations seem to say that only people with low incomes ($730 per month) and minimal assets ($2,000) qualify. With draconian limits like that, how else could people become eligible for Medicaid besides spending down their life’s savings if they need expensive long-term care? They must spend down into impoverishment. They simply must. It’s so certain there is no need or reason to seek or cite evidence that it actually happens.

That’s the trap analysts fall into if they do not consider how Medicaid financial eligibility actually works and how it is expanded vastly further for people with wealth protected by legal experts. Medicaid does not require low income because private health and long-term care expenses are usually deducted from income before the low income standard is applied. The rule of thumb is that anyone with income below the cost of a nursing home qualifies. As nursing homes cost around $8,000 per month on average, people with substantial incomes routinely qualify for benefits. Others, with even higher incomes, qualify with advice from Medicaid planning experts by converting income-generating countable assets into exempt resources.

Likewise high assets are not necessarily disqualifying. Assets are easily converted from countable to exempt form by simply purchasing the latter with the former. Medicaid planners keep long lists of exempt assets which they advise their clients to purchase in order to “spend down” without actually depleting their wealth. Furthermore, the exempt assets that Medicaid recipients may retain are virtually unlimited. Home equity is capped at between $636,000 and $955,000 depending on the state, vastly exceeding the $143,500 median home equity of older people, but many other assets are completely unlimited. These include one vehicle, household goods, personal belongings, prepaid burial funds, term life insurance, a business including the capital and cash flow and Individual Retirement Accounts. On top of these routinely allowable assets, Medicaid planners use special annuities, Medicaid trusts, reverse half-a-loaf strategies and other sophisticated legal techniques to divert even more wealth from Medicaid asset limit consideration.

While these facts are widely known and available to anyone with an internet connection, just Google “Medicaid planning,” they are routinely ignored by long-term care scholars. The experts rarely acknowledge, much less cite, the extensive formal legal literature on Medicaid estate planning. They state that Medicaid requires impoverishment, but never cite evidence that people actually spend down significant sums for long-term care before becoming eligible for Medicaid. They ignore the evidence that widespread catastrophic spend down is clearly not happening. Such evidence includes the fact that nursing home private-pay financing has nearly disappeared, amounting recently to only 7.4 percent of total revenue and that out-of-pocket expenditures for home care are only 10.2 percent of total home care spending. Ask them for proof of the asset spend down they insist is commonplace and they blank out.

Let me give you one example of how the fallacy of impoverishment misguides analysts resulting in very bad judgments and recommendations. The case in point is an article titled “The Long-Term Care Challenge” by Robert P. Saldin in the Winter 2022 issue of National Affairs, “a quarterly journal of essays about domestic policy, political economy, society, culture, and political thought.” The American Enterprise Institute, a conservative think tank, publishes National Affairs which goes to show the “fallacy of impoverishment” is not limited to the political left. Following are quotes from the Saldin article followed by our comments.

Saldin: “LTC is expensive — so expensive that it can deplete a middle-class family's lifetime of savings in a few short years. Notably, the term ‘middle class’ here includes a vast demographic range, from those just over the poverty line to those maintaining six-figure retirement accounts decades after they leave the workforce. To be sure, once individuals have burned through their assets to the point of impoverishment, Medicaid swoops in to pick up the tab. But this intervention only shifts the burden to state budgets, which crowds out other spending priorities.”

LTC Comment: Saldin says LTC expenses “can deplete” lifetime savings, implying that it does but offering no evidence. He can give no evidence because there is none. The many analysts and scholars who write on this topic never cite empirical data to substantiate the assumption that private long-term care expenses impoverish wide swaths of the American public.

Saldin: “Of course, the United States already has robust social-insurance programs targeted at various vulnerable populations. Social Security hedges against elder impoverishment and homelessness. Medicare covers most health costs for the same demographic, while Medicaid does so for the poor. Rather than undermining freedom and economic dynamism, as some critics initially worried, these forms of social insurance have provided the kind of predictability and social continuity that free, dynamic societies require. Such public backstops also have the potential to neutralize the forces of polarization and populism that fuel calls for Washington to intervene more directly in the economy.”

LTC Comment: Whoa. Social Security and Medicare are unfunded by many trillions of dollars. Young people doubt they’ll ever see the benefits those programs promise. Medicaid, that program for the “poor,” actually supports the vast majority of middle class people and many of the affluent who need expensive long-term care. Medicaid strains state and federal budgets already although the age wave has only begun to crest. Those “robust” social insurance programs, financed by decades of monetary and fiscal profligacy, have already saddled American consumers with sky-rocketing price inflation. Surely this author cannot be proposing more of the same.

Saldin: “Recognizing the LTC challenge, the Biden administration recently proposed $400 billion in new funding to support home-care workers (that proposal was included in the House-passed Build Back Better legislation, albeit with a reduced price tag of $150 billion). While the initiative's emphasis on expanding options for home- and community-based care — as opposed to less desirable and more costly institutional care — represents a step in the right direction, it fails to address the core problem at issue: Americans are woefully ignorant of the likelihood of requiring LTC. Consequently, not enough healthy people pay into the system to make a robust private market viable. The ultimate objective, therefore, should be a universal national program to mitigate the catastrophic costs that drain state budgets and impoverish middle-class Americans.”

LTC Comment: Well, yes, there it is, the ultimate objective is yet another “universal national program.” First, the Biden “Build Back Better” plan fell flat because it was unsound fiscally and monetarily. Second, the idea that home and community-based care saves money has been proven wrong repeatedly. Home care is more desirable but does not save money because it delays but does not prevent institutionalization. The big problem is that Americans are “woefully ignorant” about long-term care? Nonsense, they’ve been barraged about the risk and cost of long-term care for decades. They just don’t believe it and they’re right. Medicaid pays. Do you begin to see how the fallacy of impoverishment underlies errors of analysis and fosters mistaken conclusions?

Saldin: “The key takeaway is that American society is rapidly aging, which means that our population is going to need far more support in the coming years and decades. Since LTC is so expensive for most Americans, that increased level of need poses a serious challenge. Without reform, the situation could impose significant constraints on America's dynamism and vitality.”

LTC Comment: Well, true, but how does relying on the government to print and spend a lot more money we don’t have help? We're seeing now how the cost of government “generosity”—creating money out of thin air and giving it to people to spend and letting the ineligible remain on Medicaid during the pandemic—has to be repaid. We’re no longer dumping this obligation only on our “children and grandchildren.” We’re paying for it ourselves through consumer price inflation, and will be doing for decades.

Saldin: “For those who aren't wealthy, LTC expenses can quickly exhaust personal savings. To the surprise of many, Medicare does not cover LTC expenses. This means that individuals and families are often paying out of pocket for care unless they are poor enough to qualify for Medicaid or are among the few with private LTC insurance.”

LTC Comment: There’s the fallacy of impoverishment again. We’re offered a presumption that LTC wipes out savings. No evidence; no citation. Poor enough to qualify for Medicaid? How poor is that? Not very according to the fallacy of impoverishment. Few people have LTCI? Why is that? The government has paid for most expensive long-term care since Medicaid began in 1965. Authors and papers like this one never ask the right question. Why is American long-term care such a mess in the first place? So they never put the blame where it belongs, on public policy that convinced the public they can ignore long-term care risk and cost.

Saldin: “Although there is considerable variation, the average person reaching the age of 65 will require $138,000 in LTC spending. Roughly half of Americans reaching age 65 will face ‘significant need’ — defined as being unable to perform multiple activities of daily living without assistance. For about 15% of American adults, the average cost will exceed $250,000 over the course of a lifetime.”

LTC Comment: $138,000? That’s the huge financial catastrophe driving our need to socialize long-term care? The same source (Favreault and Dey, 2016, p. 1) that came up with that total average need also said someone would only have to invest about $70,000 now to cover it in the future. Older Americans possess $9.2 trillion in home equity, which could lap up that small risk easily. $250,000 for 15%? That’s where private insurance would make the problem go away if it weren’t for the government obscuring the risk by paying for most expensive long-term care already through Medicaid.

Saldin: “The current system of LTC provision puts intense pressure on the middle class. Unlike the poor — who have few assets to spend down prior to reaching Medicaid eligibility — and the wealthy, who can finance their own care with relative ease, those in the vast middle have a lot to lose. About half of households aged 55 or over have retirement savings, but the median amount is just $109,000 [https://www.gao.gov/assets/gao-15-419.pdf]. For many families, a sum like that represents a lifetime of responsible saving, giving off the appearance of a healthy nest egg. But even average LTC expenses can eat through that amount in short order. Another 23% of households aged 55 or over have defined-benefit plans but no funds earmarked for retirement. Though many of these households are well above the poverty line, their plans are unlikely to provide enough funds to cover LTC costs.”

LTC Comment: Do you get it yet or does he have to say it for a fourth time? LTC wipes out middle class Americans’ savings all over the country. That’s a matters of faith, an assumption you must accept even though there is no evidence and Medicaid operates so that such catastrophic spend down is unnecessary.

Saldin: “In sum, the financial burden of our LTC-provision system falls squarely on the shoulders of a remarkably broad middle-class cohort that stretches from just above the poverty line to those who are still sitting on six-figure savings after a couple of decades of retirement. Medicaid provides a safety net, but qualifying for the means-tested program requires being in financial ruin. And even then, the economic burden doesn't go away; it's merely shifted from the individual to society.”

LTC Comment: OK, evidently we’re too stupid to have understood the first three times we were told this so a fourth was necessary. We’ve already shifted the long-term care burden to society? Then why would shifting even more help? The truth is we have already shifted most of the catastrophic burden to government. That’s why we have the current system’s problems: deficient access and quality, institutional bias, inadequate reimbursements, caregiver shortages, disappearing private payments and inadequate private insurance. Society, Medicaid, took the burden of long-term care off the shoulders of consumers and look what it delivered instead.

Saldin: “In addition to the political constraints it places on reformers, widespread ignorance regarding LTC has led America's patchwork system of LTC provision to be plagued by a classic case of adverse selection. Because there is relatively little interest in planning for LTC needs, the population interested in coverage is far more likely to already need care. This situation makes a non-mandatory program untenable, since there would be too few healthy people paying into the system to cover its costs.”

LTC Comment: It is not the public that’s ignorant about long-term care, but authors like this one. Of course a non-mandatory program is tenable; only a non-mandatory program is tenable. What he is saying is that freedom to choose does not work. That people must be forced by government to participate whether they see the value or not. Private insurance works for life insurance. It would work for long-term care also if government had not eliminated the catastrophic event which is the incentive to insure privately.

Saldin: “To re-conceptualize that system, reforming LTC should be understood as part of a broader effort to bolster the American social safety net in a way that promotes economic freedom and helps bring some much-needed stability to our democracy. As the Niskanen Center's Samuel Hammond has emphasized, combining free markets with a more universal system of social insurance can facilitate free enterprise by providing the kind of social continuity and certainty that are essential for sustainable economic dynamism.”

LTC Comment: What kind of Orwellian double speak is this? Compulsory payroll-funded government insurance makes us free? No, getting government to stop forcing us to do things against our will, things that hurt no one else, that’s what makes us free.

Saldin: “In addition to framing LTC reform as part of a broader effort to bolster the American social safety net, policymakers need to address the system's status quo, which leaves a broad swath of Americans vulnerable to financial ruin. This weakness is especially apparent when considering how people become eligible to receive assistance from Medicaid for LTC expenses. To do so, people must ‘spend down’ their savings until they are impoverished. Since wealth transfers are prohibited and Medicaid's five-year ‘look-back’ period is designed to ensure that applicants haven't, say, gifted money to family members, ‘spending down’ typically means spending assets on LTC until the Medicaid threshold is met.”

LTC Comment: I guess if you make the same false statement often and strongly enough, some people will begin to believe it.

Saldin: “These eligibility requirements hit the middle class the hardest. Poor Americans have few assets to burn through before qualifying for Medicaid, while the wealthy are often able to self-finance their care without significantly diluting their wealth. But for middle-class Americans hoping to pass on modest inheritances to family members, LTC expenses can be crushing. Reform efforts should seek to mitigate that risk while also recognizing that it's reasonable to expect middle- and upper-class individuals to make some provision for the likelihood they will have LTC needs as they age.”

LTC Comment: Thanks, I must have missed that point the first six times you made it. Do you begin to see why the whole argument authors like this are making relies entirely on the fallacy of impoverishment? Their conceptual framework falls apart without it.

Saldin: “Ultimately, meeting that challenge will require a national program focused on catastrophic LTC costs. But passing such a program is a heavy lift in our current political climate.”

LTC Comment: We already have a national program focused on catastrophic LTC costs. All we need to do is let it work the way it was intended to work by enforcing meaningful financial eligibility limits and recovering from estates so that people who fail to plan for long-term care and end up relying on Medicaid have to reimburse the government for the cost of their care. That is the “long-term care social contract.”

Saldin: “In the United States, the objective need not be a comprehensive program that covers every last dollar of LTC spending. Rather, reform should be geared toward the most daunting concerns facing individuals, families, and American society: the risk of financially catastrophic LTC expenses and the excessive burden LTC spending imposes on state budgets. A government-sponsored public program, or even a regulated private-insurance program that provides standard coverage for catastrophic LTC expenses, would go a long way toward addressing these challenges without expecting the public to provide complete protection for the assets of wealthy and middle-class Americans.”

LTC Comment: We already have that; all we need to do is enforce its rules: reasonable and universally enforced financial eligibility limits, liens to hold exempt property during Medicaid eligibility and later estate recovery to reimburse Medicaid with some of the savings going to incentives for private long-term care insurance.

Saldin: “The resulting program should address the high cost of institutionalized care. As noted above, shifting as much LTC as possible from institutionalized settings to home- and community-based settings is certainly desirable, but nursing homes will always be necessary, too. It is here that costs are highest and the burden on the middle class and Medicaid is greatest.”

LTC Comment: Private-pay nursing home revenue is down to 7.4%. Medicaid pays for most expensive long-term care. Home and community-based care does not save money.

Saldin: “Alternatively, individuals could be required to carry private, government-approved catastrophic LTC coverage. Subsidies would be needed to assist those with few assets, but this formulation would make certain that healthy and middle-class Americans would be funding at least some of their own LTC needs. Income-based premiums — already a feature of Medicare parts B and D — could further ensure that the middle class and especially the wealthy are contributing to their own LTC needs rather than leaving taxpayers to pick up the tab. Coverage could be structured like the private LTC insurance plans that are already available, which provide daily benefits of about $128 for five years.”

LTC Comment: Again with the compulsion, even for private insurance. And note the irony that Medicare, supposedly social insurance, is being welfarized by charging “income-based” premiums.

Saldin: “Again, the mandated coverage should be geared toward helping older adults with the kind of catastrophic expenses that lead to family impoverishment. Because the average stay in a nursing home is just under three years, individuals could be required to carry a plan covering that length of time. As noted earlier, a shared room in a nursing home costs about $93,000 per year, which could be covered with a daily benefit of about $250. Those living beyond the covered three years could become eligible for Medicaid immediately. This scenario would retain Medicaid as a key player in LTC spending but would dramatically reduce its obligations, thereby easing budgetary pressure on state governments. If participation was mandatory, premiums would be far more reasonable than those now available from private insurers.”

LTC Comment: Oh, impoverishment is a problem? Who knew? Why didn’t you say so? Compulsion again.