- CBO projects that spending on long-term care will more than double by 2050—to 3% of GDP
- Significant long-term care benefits flow to individuals in the top 20% of retirement earnings
- Alternatives to Medicaid long-term care are needed for those with means, while the safety net for the elderly poor remains intact
- The current Medicaid long-term care program is neither equitable nor fiscally sustainable
Expanding Medicaid coverage to an estimated nine million more Americans—as mandated by the Affordable Care Act—reinforces the idea that Medicaid only serves the poor. That perception is not accurate. And it distracts from a looming budgetary threat to the program: long-term care.
More than two-thirds of annual spending on long-term care for the elderly is paid by state and federal governments, $60 billion of which flows from Medicaid. With 10,000 baby boomers reaching retirement age every day for the next 19 years, the Congressional Budget Office projects that spending on long-term care will more than double by 2050—to 3% of GDP from 1.3%.
We might accept these rising costs if benefits flowed only to the elderly poor, as originally intended. But that is not the case. Significant long-term care benefits flow to individuals in the top 20% of retirement earnings, enabled by Medicaid's generous asset-exclusion limits.
In many states, an elderly person may own a home valued at $802,000, plus home furnishings, jewelry and an automobile of uncapped value while receiving long-term Medicaid support. In addition, they are allowed to have various life-insurance policies, retirement accounts with unlimited assets, $115,920 in assets for a spouse, income from Social Security, and a defined-benefit pension plan. By most standards, such a household would be considered wealthy.
Despite these generous rules, some individuals even game the system further by arranging complex asset transfers or insurance transactions that sidestep congressional efforts to curb fraud.
The rules wouldn't matter if wealthy individuals shunned Medicaid long-term care benefits. But with Medicaid crowding out private alternatives, many don't. In fact, 15% of elderly individuals in the middle-income quintile, 8% in the upper-middle quintile, and 5% in the top quintile receive Medicaid benefits.
Even these numbers don't capture the burden wealthy individuals place on Medicaid because they live much longer than the poor. Beneficiaries in the top income quintile receive, on average, double the lifetime payouts of those that are less well-off. And because Medicaid lowers reimbursement rates to providers and restricts benefits to contain costs, the poor are tied to lower-quality care and enjoy far less provider flexibility.
Funds for Medicaid are disbursed to the states by the federal government through complicated formulas. States in turn administer Medicaid and long-term care to state residents. While the rules for each state vary, state governments are mandated by law to pursue the estates of wealthy residents to recoup the costs incurred by their use of long-term care programs. Yet the most recent study by Health and Human Services found that most states recoup less than 2% of total long-term care spending. Four states—Alaska, Georgia, Michigan and Texas—even reported no reimbursements whatsoever.
Tightening eligibility rules is the first step toward a solution. Before receiving Medicaid payouts, for example, wealthier households should first be asked to draw down the value of their home through a reverse mortgage to help pay for long-term care. Wealthier households could also be asked to meet long-term care expenses through life annuity payouts from their retirement accounts. Such changes would help ensure that Medicaid benefits flow to the financially needy.
Clearly, alternatives to Medicaid long-term care are needed for those with means, while the safety net for the elderly poor remains intact. Four key policy changes would help transform the system into a more equitable and sustainable one that better serves America's seniors:
First, provide a tax preference for long-term care insurance policies through retirement and health accounts. Allowing tax-free withdrawals from existing 401(k), IRA, or Section 125 accounts to pay for private long-term care insurance would have minimal budget implications. Lower tax revenues would be offset by cost savings provided by wealthier seniors drawing on private resources—rather than public funds—to pay for care.
Second, promote innovative products, such as "life-care" annuities, which marry life annuities to long-term care insurance, allowing individuals to finance their care as well as their retirement. Combining long-term care insurance and life annuities would decrease their combined costs and considerably ease underwriting standards, enabling more seniors to afford long-term care coverage.
Third, foster long-term care partnership programs already operating in most states. These public-private partnerships allow residents to purchase long-term care insurance and still qualify for Medicaid if their insurance is exhausted—without depleting all of their assets. That combines the benefits of private insurance with the backing and safety net of the government.
Fourth, allow a Medicaid "buyout." 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. Retirees would be obliged to use the payment to purchase private, permanent long-term care insurance in place of Medicaid coverage. This would further reduce Medicaid's future liabilities.
The current Medicaid long-term care program is neither equitable nor fiscally sustainable. If we want Medicaid to cover those who truly need it, we must design an efficient system that leans more heavily on private-sector innovation—such as life-care annuities—and relies on responsible household planning to finance the care of wealthier American retirees.
Mr. Warshawsky, an adjunct scholar at the American Enterprise Institute, is a former vice chairman of the federal Commission on Long-Term Care, appointed by Congress and the president last year.