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Form follows financing

April 1, 2008
by Paul Willging, PhD
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I know this is a radical thought, but it just seems to me that healthcare financing and reimbursement systems ought to focus on the needs of the customer. They should be a function of customer need—perhaps even of customer preference. But they aren't, and the customer suffers as a result (perhaps without even realizing it). This is true of both Medicare and Medicaid—unfortunate for us, in that these are the primary funding sources for long-term care.

Certainly, both programs have brought significant benefits to seniors. By virtually any measure, the introduction of Medicare led to a dramatic increase in seniors' overall quality of life. The number of elderly people living in poverty dropped from 28% in 1960 to less than 9% today; a significant reason for this may be that Medicare has enabled many people to avoid depleting their assets to fund medical care. And Medicare continues to provide seniors a level of medical security previously unknown in the United States.

That notwithstanding, Medicare is structured as if recipients need only short-term care when, in reality, aging is best characterized by chronic conditions. But Medicare is not designed to pay for such conditions (much less for long-term care). Because of these and other constraints, Medicare in 2000 paid beneficiaries only about half of their total personal healthcare expenditures.

Because Medicare covers barely half of all seniors' medical costs, lower-income elderly in particular need additional assistance to obtain adequate healthcare. This is not an insignificant population: 43% of seniors—13 million people—have incomes below $15,980 for one senior living alone or $20,150 for two seniors in one household. Clearly, individuals in this income range could not afford long-term care without significant financial support.

For the poor, this gap has been made up for by Medicaid. Medicaid has met its intended goal of providing greater access to healthcare for low-income seniors, and beneficiaries eligible for both Medicare and Medicaid spent only 4.6% of income for healthcare.

Medicaid pays for those more prevalent conditions among seniors that Medicare does not. Although the elderly are only a small percentage of Medicaid recipients (17%), they consume the largest percentage of program dollars. That's because the program is the largest insurer of long-term care for all Americans, including the middle class, covering 66% of nursing home residents and over 50% of all nursing home costs.

The downside of all of this (along with the personal stigma of being on “welfare”) is that Medicaid is breaking the proverbial bank. That is the issue which, if not successfully addressed, might lead us 20 to 30 years hence to refer to these as the “good old days.” Medicaid was never envisioned as the primary funding mechanism for long-term care. It assumed that role because of the concept called “spend down,” providing nursing home services to those whose healthcare costs have impoverished them. Aside from guiding Americans toward the institutional setting that most would prefer not to use, Medicaid coverage has perpetuated a notion that long-term care is free. Forget about that half of America's seniors who, according to AARP data, falsely assume that Medicare will pay for their long-term care costs. Even those who understand the distinctions between the two programs have come to see Medicaid-funded long-term care as a “free” good (or at least, like Medicare, an entitlement paid for with their tax dollars).

Stephen Moses, president of the Center for Long-Term Care Reform, put it best in a 2005 Cato Institute monograph, “Aging America's Achilles' Heel”:

The fundamental problem with LTC financing is that government pays for so much of it that the public has been anesthetized to the risk and expense of high-cost extended care. People can ignore the risk, avoid the premiums for private insurance, wait to see if they will need LTC, and transfer the cost to taxpayers. Is it any wonder that so few Americans buy private insurance or use reverse mortgages to finance LTC? Is it any wonder that most Americans who need LTC end up dependent on Medicaid?

Steve's solution is a simple one (although its political viability might be something else again). He would severely truncate many of the currently legal methods used by seniors to preserve assets while maintaining their Medicaid eligibility. He would eliminate all or most of Medicaid's open-ended home equity exemption for long-term care recipients, while placing limits of the amounts of other assets people could shelter. And he would extend the look-back period for the transfer of real property from five to twenty years.

Such measures would lead most Americans (particularly the children of otherwise eligible seniors) to think much more seriously about private methods of long-term care financing (e.g., insurance). After all, with the house gone, there would be less or no estate to inherit. Worse, the financial burden of caring for mom or dad might rest on the child's own shoulders—as, in fact, it does today in many cases, as baby boomers are slowly becoming aware.

Since we're talking here about the politically problematic, I might even take Steve one step further. My concern is not just the 22% of Medicaid recipients that Steve suggests would no longer be inappropriately eligible. I am equally concerned about those who would be eligible. While one might argue that the resulting $30 billion dollars in annual savings (Steve's estimate) would be used by federal and state governments to increase reimbursement rates and thus improve the quality of care in today's nursing homes, I wouldn't hold my breath.