America spent $110.8 billion on nursing home care in 2003. According to CMS, the percentage of nursing-home costs paid by the government (mostly Medicaid and Medicare) has been going up for the past 15 years (from 49.6% in 1988 to 58.5% in 2003, up 8.9% of the total) while out-of-pocket costs have been declining (from 38.5% in 1988 to 27.9% in 2003, down 10.6% of the total).

So what? The consumer's liability for nursing home costs has gone down precipitously (from 38.5% in 1988 to 27.9% in 2003, a decline of 27.5%) while the government's liability has increased dramatically (from 49.6% in 1988 to 58.5% in 2003, a rise of 17.9%). It’s no wonder people are not as eager to buy LTC insurance as insurers would like them to be! No wonder nursing homes are struggling financially -- their dependency on stingy government reimbursements is increasing, while their more profitable private payers are disappearing.

Unfortunately, these problems are even worse than the preceding data suggest. Over half of the so-called "out-of-pocket" costs reported by CMS are really just contributions toward their cost of care by people already covered by Medicaid! These are not out-of-pocket costs in terms of asset spend-down, but rather only income, most of which comes from Social Security benefits, another government program. Thus, although Medicaid pays less than half the cost of nursing home care (46.1% of the dollars in 2003), it covers 70% of all nursing home residents. Because people in nursing homes on Medicaid tend to be long-stayers, Medicaid pays something toward 80% of all patient days.

So what? Medicaid pays in full or subsidizes four-fifths of all nursing home patient days. If it pays even one dollar per month (with the rest contributed from the recipient’s income), the nursing home receives Medicaid's dismally low reimbursement rate. No wonder the public is not as worried about nursing home costs as LTC insurers think they should be. No wonder nursing homes are facing insolvency all around the United States when so much of their revenue comes from Medicaid, often at reimbursement rates less than the cost of providing the care.

Don't be fooled by the 7.6% of nursing home costs that CMS reports as having been paid by “private health insurance” in 2003. CMS derives that number by subtracting all the known costs from 100% and reporting the remainder as private insurance. No one knows how much private health insurance really pays toward nursing home care because most long-term care insurance pays beneficiaries, not nursing homes. Thus, a large proportion of insurance payments for nursing-home care gets reported as if it were out-of-pocket payments because private payers write the checks to the nursing home but are reimbursed by their LTC insurance policies. This fact further inflates the out-of-pocket figure artificially.

How does all this affect assisted living facilities? ALFs are 90% private pay and they cost an average of $30,288 per year (source: MetLife). Many people who could afford assisted living by spending down their illiquid wealth choose instead to take advantage of Medicaid nursing-home benefits. Medicaid exempts one home and all contiguous property, one business, and one automobile, all of unlimited value, plus many other non-countable assets, not to mention sophisticated asset-sheltering techniques marketed by Medicaid planning attorneys. Income rarely interferes with Medicaid nursing-home eligibility unless such income far exceeds the cost of private nursing-home care.

So what? For most people, Medicaid nursing-home benefits are easy to obtain without spending down assets significantly, and Medicaid's income-contribution requirement is usually much less expensive than paying the full cost of assisted living. No wonder ALFs are struggling to attract enough private payers to be profitable. No wonder people are not as eager to buy LTC insurance as insurers would like them to be.

The situation with home health care financing is very similar to nursing-home financing.

According to CMS, America spent $40 billion on home health care in 2003. Medicare and Medicaid paid 57% of this total and private insurance paid 18.3%. Only 16.5% of home health care costs were paid out of pocket. The remainder came from several small public and private financing sources.

So what? Less than one out of every six dollars spent on home health care comes out of the pockets of patients. No wonder they do not feel the sense of urgency about this risk that long-term care insurers think they should.

Bottom line, people only buy insurance against real financial risk. As long as they can ignore the risk, avoid the premiums and get government to pay for their long-term care when and if such care is needed, they will remain in denial about the need for LTC insurance. As long as Medicaid and Medicare are paying for a huge proportion of all nursing-home and home health care costs while out-of-pocket expenditures remain only nominal, nursing homes and home health agencies will remain starved for financial oxygen.

The solution is simple. Target Medicaid financing of long-term care to the needy and use the savings to fund education and tax incentives to encourage the public to plan early to be able to pay privately for long-term care.