Cautionary tales abound about relatively affluent households being forced to spend their accumulated wealth on expensive long-term care for a family member. With the annual cost of care well above $100,000 in many parts of the country, it doesn't take long to drain a family's financial resources. Once the money is gone, the family member can qualify for Medicaid, and Uncle Sam will pick up the tab for long-term care.
The only problem with this tale is that it isn't true for many people. A study of actual Medicaid spend-down patterns finds that it is overwhelmingly poorer households that qualify for Medicaid by exhausting their relatively meager financial assets. The SCAN Foundation, which supported the research, says it's the first detailed look in 25 years at how Americans actually qualify for Medicaid support for their long-term care needs.
This finding has important implications for any effort to develop a large-scale support system to help families pay for long-term care. Studies show that 70 percent of us will need some period of extended long-term care during our lives, most commonly during our later years. This figure is so large that it argues for some kind of insurance program to spread the costs of care over a larger population. That's the way auto and home insurance work. The premiums from people with little or no claims wind up effectively supporting the claims of people with big losses.
The Affordable Care Act—aka Obamacare—included a new program for voluntary long-term care insurance. But because it was voluntary, it soon became clear that relatively young and healthy people would not sign up for it. Their absence doomed the program because the high level of expected claims priced the product out of the reach of the people most likely to use it. So the government killed the program.
Most long-term care is paid for by Medicaid. Many people mistakenly think their Medicare will pay for extended long-term care but it does not. Private insurance collects only about $7 billion in premiums each year and pays only a few percentage points of the nation's long-term care expenses.
The SCAN study found that nearly 10 percent of new Medicaid participants between 1996 and 2008 qualified under the program's economic means test by spending down their assets. "Medicaid spend down is not a rare event," the study said. "Moreover, among people who were Medicaid beneficiaries at any time during this time period, almost two-thirds became eligible after spending down to Medicaid eligibility."
The study further found that "people who spend down are disproportionately black, Hispanic, unmarried, and have lower levels of education, all characteristics associated with lower levels of income and assets."
"It has long been the strategy of many policy makers to promote private long-term care insurance with the expectation that savings to Medicaid would follow," it added. But it said that if people who qualify for Medicaid tend to have lower incomes, it's unlikely they would be able to afford to buy private insurance. "Promoting private sector long-term care insurance without very deep subsidies is unlikely to have more than a marginal impact on Medicaid expenditures."
If private insurance doesn't work and voluntary programs don't work, the remaining policy choices point to a mandatory program. And the most logical manager of such a program would be Medicaid, much the same as Medicare is the manager of senior health insurance even though private companies sell and administer the policies.
Funding Medicaid expansion by higher payroll taxes would increase financial support without adding to deficits. It also would amount to a strengthening of the nation's retirement system. That's because the biggest expense in retirement is often health care. Forcing people to set aside more money for health care thus would reduce their retirement expenses.
Because Medicaid benefits flow overwhelmingly to lower-income families, such a program would, in effect, tax wealthier wage earners to subsidize poorer Americans. This, by the way, is pretty much how Social Security works, as its payment system provides much higher wage replacement rates to lower-wage beneficiaries than to wealthy ones.
Having laid out this scenario, don't expect it to be adopted soon or, perhaps, ever. After all, the nation is divided over whether to let states accept even a massive expansion of Medicaid to insure lower-income Americans under the Affordable Care Act. Raising payroll taxes? To pay for long-term care? Not gonna happen.