An annual savings of $5 billion per year can be saved
in the US government’s Medicaid program… through
the use of reverse ...
Acknowledgments
In doing a study that explores saving Medicaid dollars from expanding the use of home equity to pay for
in...
Table of Contents
1. 	 Executive summary.....................................................................................
1
1. Executive summary
Our country is at a financial tipping point
Here’s a quick primer on economics for countries.
Most ...
2
Medicaid dollars are wasted. Few would challenge
the claim that the Medicaid program is poorly run,
inefficient and is a...
3
borrowers that would delay or eliminate the need
for Medicaid.
One of the keys to increasing the use of reverse
mortgage...
4
when its formal debt exceeds its annual output
of goods and services – it’s GDP. This isn’t an
arbitrary measure. When a...
5
given a subsidy. This is a very fundamental and
important fact to understand. The reverse mortgage
program has never bee...
6
therefore needing an approved appropriation from
Congress for that amount.
FHA/HUD’s influence over our program-how
they...
7
the temporary times of declining home prices, the
economics of the reverse mortgage program suffer.
But the reality is t...
8
and disabled enrollees are more than 8 million in-
dividuals who have Medicare too. They are known
as “dual eligibles.”
...
9
Generally, the same Medicaid benefits must be
covered for all Medicaid enrollees statewide. How-
ever, states have some ...
10
How is Medicaid financed?
The federal government and the states share the
cost of Medicaid through a matching system. T...
11
Security and Medicare have spurious “trust funds,”
Medicaid draws its financing from general tax
revenue without even t...
12
LTC. If they have too little income to pay all their
medical expenses, including nursing home care,
they’re eligible. M...
13
ited value. How is this rule used to protect assets?
Here are some examples:
A new amendment to the Social Security Act...
14
assets on something “frivolous,” such as a 90th
birthday celebration ... and this should not be cause
for denial of Med...
15
for more affluent clients and their heirs. Such tech-
niques include gifting strategies, annuities, trusts,
life-care c...
16
out-of-pocket expenditures are actually the recipi-
ents’ Social Security income, which the recipients
are required to ...
17
home equity any way they see fit and still remain
in their homes as long as they are physically able
to do so. Forty-ei...
18
are on Medicaid, the reluctance of some nursing
homes to accept Medicaid patients may make it
difficult for you to tran...
19
limits on these exemptions would give adults more
incentive to plan responsibly for their parents’ and
their own LTC ne...
20
Medicaid coverage. If it can be shown that
she simply refuses to spend her money on
her husband’s care, Medicaid covera...
21
the Senate Finance Committee staff believes the
potential savings to Medicaid are even greater. In
a speech to the Nati...
22
would be to replace Medicaid’s wide-open home
equity exemption with a more limited exemption
of home equity or none at ...
23
mortgage borrowers continue to own the home and
are responsible for paying property taxes, hazard
insurance, and mainte...
24
HECM program. Borrowers who apply for any
reverse mortgage must first receive independent
counseling before they comple...
25
(11 percent). Adult children (11 percent) were
more likely than senior respondents (1 percent) to
mention the benefit t...
26
reverse mortgage to buy a long-term care policy.
Interestingly, 19 percent of adult children felt that
this option woul...
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
Reverse mortgage save medicare and social security 5 billion a year
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Reverse mortgage save medicare and social security 5 billion a year

  1. 1. An annual savings of $5 billion per year can be saved in the US government’s Medicaid program… through the use of reverse mortgages. This can be achieved by keeping seniors in their homes, as opposed to being on the government dole in nursing homes paid for through Medicaid. Today Medicaid costs almost $400 billion a year. The biggest cost component is nursing home care. Even more alarming, in 2014 Obama Care kicks in. This will add 20 million people to the already 53 million on Medicaid, an increase of 38%. The problem is urgent –and this study explains in detail how HUD’s reverse mortgage program is the primary cost saving opportunity available for Medicaid today. By: John S Mitchell, CPA-Austin, Texas White Paper Study Medicaid Cost Solution 2011 and 2012… Reverse Mortgages
  2. 2. Acknowledgments In doing a study that explores saving Medicaid dollars from expanding the use of home equity to pay for in-home services requires the input and insight the many people and organizations. First of all, we want to thank Barbara R. Stuckey, PhD with the National Council on the Aging. Her landmark study “Use your home to stay-at-home – expanding the use of reverse mortgages for long term care: a blueprint for action” was a foundational piece of our study. The many people that contributed to that study are to be commended. Also we want to thank Stephen A. Moses of the Cato Institute for his study “Aging America’s Achilles’ heel Medicaid long-term care”. It’s an exceptional study that really articulates succinctly and clearly the problems and opportunities with regards to the Medicaid program. Lastly, we want to acknowledge Scott Burns, one of the top five financial writers in the country. Scott so eloquently and so succinctly articulates the financial situation that our country finds itself in today, and for that we are very grateful.
  3. 3. Table of Contents 1. Executive summary..........................................................................................1 2. The debt of the United States in 2011 – ..........................................................3 the US government is at the financial tipping point 3. Reverse mortgages – political challenges 2011...............................................4 4. Technology – is making it easier to keep seniors in .......................................7 their homes versus going into a nursing home 5. Medicaid – how it works and where are the problems....................................7 6. Reverse mortgages and long-term care..........................................................21 7. Current size and future potential of the reverse mortgage market.................29 8. Potential savings to Medicaid .......................................................................37 9. Consumer attitudes towards using home equity for long-term care..............40 10. Role of the government..................................................................................49 11. Conclusions and actions to take.....................................................................51 12. References......................................................................................................53
  4. 4. 1 1. Executive summary Our country is at a financial tipping point Here’s a quick primer on economics for countries. Most economists agree that a nation is in trouble when its formal debt exceeds its annual output of goods and services – it’s GDP. This is not an arbitrary measure. When a nation has debt equal to its annual output, the annual cost of interest on the debt is likely to be greater than the annual growth of the economy. To illustrate this, the interest rate on the national debt may approximate 4%. If the economy is not growing by a similar amount, a country can slide toward a hopeless debt spiral. And the more the debt exceeds the nation’s annual output, the faster the downward spiral. That’s what is happening in the United States today. Our formal debt is $14.1 trillion. Our gross domestic product for 2011 is estimated at $14.7 trillion – about the same. So we are already at the flashpoint. The United States economy certainly isn’t growing at a rate anywhere close to the interest rate on the national debt. Accordingly, the country is at a tipping point…bad news. And if that news wasn’t bad enough, consider this. As mentioned above, the United States formal debt is $14.1 trillion. But that does not include our informal debts. What are informal debts? They are promises of future benefits – payments – embedded in the entitlement programs like Social Security, Medicare and Medicaid. They may not be treasury bonds, but most of us regard these programs as very strong promises. Citizens riot when governments default, renege or even fiddle with promises like these and unfortunately these unfunded liabilities are gigantic. For Social Security, Medicare and Medicaid the unfunded liability exceeds $70 trillion. Add that to the $14.1 trillion formal debt and now you get a real sense of the dire economic reality the United States faces in 2011. To further put this in context, read the respected white paper study published in 2010 by the Bank of International Settlements in Zürich. Titled “The future of public debt: prospects and implications”, the paper examines the formal debt of Austria, France, Germany, Greece, Italy, Ireland, Japan, the Netherlands, Portugal, Spain, the United Kingdom and the United States. The shock is that the US is considered in the same sentence with the well- known basket cases of Europe – Greece, Italy, Ireland, Portugal and Spain. We are accustomed to thinking that those are countries we rescue, not countries with similar finances. But the numbers don’t lie. Those are countries have similar numbers to the United States regarding their economies and their debt. The primary solution – reign in the entitlements In the United States, the three major entitlement programs; Social Security, Medicare, and Medicaid account for approximately 58% of the annual budget. Other than national defense, these entitlements dwarf the other components of the budget. Accordingly the solution to the national debt problem of the United States noted above can only be found in scaling back and finding savings in the big three entitlements. Again, the math doesn’t lie – this is the only path to get the national debt under control and restore fiscal responsibility to our government’s finances. Medicaid – the problem Medicaid currently covers 53 million people at an annual cost of $373.9 billion with the states responsible for about half of it. Starting in 2014, the Obama Care rules will add about 20 million people to Medicaid, all at one time according to Medicaid’s chief actuary, Richard Foster. This is a 39% increase from the existing 53 million people covered. The biggest expense of Medicaid is for long-term care primarily for the elderly. We spent $98 billion a year on this, with the majority spent on nursing home care. It’s a staggering number. Further, it’s been well documented that when people are institutionalized and put in a nursing home, often times they are over treated and overmedicated and
  5. 5. 2 Medicaid dollars are wasted. Few would challenge the claim that the Medicaid program is poorly run, inefficient and is a huge obstacle in getting this nation’s spending problem under control. And the Medicaid problem is only growing as the baby boomer generation evolves into old age. But the most serious problem with regards to Medicaid is the eligibility side of the equation. Medicaid eligibility rules are very loose and that’s the fundamental problem. Today, there is a thriving industry within the legal community that helps people shift their assets so that they can qualify for Medicaid and have their long-term care paid by the government rather than themselves. To make matters worse, Medicaid has codified into law the planning techniques allowing this. It is for this reason that, to a large extent, Medicaid has evolved from its intended purpose of being the provider of quality long-term care for the genuinely needy into the role it actually plays today-protecting people’s inheritances. That’s really the role that Medicaid plays today and it’s contributing to bankrupting the United States. Probably the most glaring specific problem in the Medicaid eligibility rules is Medicaid allows a person to exclude their personal residence, regardless of value, from the means test to determine if a person qualifies for Medicaid. The effect of this is there is no incentive for people to take responsibility for paying for their own long- term care with their biggest asset – their home. That’s why today Medicaid is the primary payer of nursing home care in the United States instead of individuals taking financial responsibility for their own long-term care. Reverse mortgages – the solution to Medicaid According to the National Council on the aging, 81% of America’s 13.2 million households age 62 and over own their own homes. 74% of those senior homeowners own their homes free and clear. That’s right, 74% own their homes free and clear! Altogether, seniors own nearly $2 trillion worth of home equity. That wealth is illiquid, and is largely untapped for long-term care costs. It is totally exempted from Medicaid eligibility limits, and is usually protected against Medicaid estate recovery. A solution to utilize this untapped source of funding for seniors is a reverse mortgage.Areverse mortgage allows a senior to access cash from their biggest asset-their home. And, when they are able to do that, they can take care of their own future health care needs and not burden the federal government. Here’s what a reverse mortgages in plain English. It’s an FHA home loan that’s available only to people 62 and older. It works as follows: the senior receives money today, pays it back after they die or sell the house. No monthly payments, no out- of-pocket costs and the senior typically gets about 60% of the value of the house. When the senior dies, the house is sold by the estate – and the loan (plus all accrued interest) is paid back from the sales proceeds. The remaining proceeds go to their heirs. The reverse mortgage program was originally created by AARP. And to further enhance the reverse mortgage value proposition, the biggest argument against reverse mortgages was eliminated in 2010; the perception of high costs. But in 2010, HUD’s reverse mortgage program was revamped and the program’s costs were substantially reduced-clearing the way for a much more widespread acceptance of reverse mortgages in the future. Medicaid savings via Reverse Mortgages - $3.3-$5 billion a year Increased use of reverse mortgages for long-term care could result in savings to Medicaid ranging from about $3.3 billion to almost $5 billion annually, depending on the future take-up rate for the these loans.This represents 6% to 9% of the total projected annual Medicaid expenditures. These savings result from the additional cash available to
  6. 6. 3 borrowers that would delay or eliminate the need for Medicaid. One of the keys to increasing the use of reverse mortgages in the future is to eliminate the home exemption rule for Medicaid eligibility. As previously noted, under the Medicaid rules today, a person can qualify for Medicaid but still have had a home of unlimited value. Additionally, increasing the asset transfer lookback rules (3-5 years) that Medicaid has today also needs to be a priority. Changing this will increase the use of reverse mortgages- and will fundamentally shift the responsibility for the future long-term care of seniors off the government’s shoulders back onto the shoulders of the individuals. Summary Can you connect the dots? First, the United States is at a financial tipping point. We have a $14 trillion annual economy and a $14 trillion national debt. Additionally we have a $70 trillion plus unfunded liability from the entitlements-Social Security, Medicare, and Medicaid The growth rate of the economy is projected to be, over the next few years, at about half the interest rate on the national debt. Accordingly, we are starting a downward spiral which will pick up momentum with each coming year as the entitlements’unfunded liabilities comes even more into play with the increased aging of the overall population. And in the current fiscal year, the budget deficit is projected to be $1.6 trillion, of which 58% of the budget pertains to the three entitlement programs. Because we are at the tipping point, time is running out and action must be taken now on the entitlements. Secondly, one of the big three entitlement programs – Medicaid-is a program that has a well-documented history of being poorly run. But even worse than that, it has been allowed, by elected officials pandering to special interests in order to get reelected, to evolve away from its originally intended purpose of being the provider of quality long-term care for the truly needy to the role it actually plays today - protecting people’s inheritance at the expense of theAmerican taxpayer. Thirdly, and here’s a bit of good news for a change, there is an available solution that will save $3.3 billion – $5 billion annually in Medicaid expenses. That solution is reverse mortgages, a HUD program started in 1989 that has never received a subsidy and has always been a moneymaker for the US government since its inception. So the time to act is now for members of Congress to make some much-needed changes to Medicaid and its eligibility rules, in addition to supporting reverse mortgages as a key component of Medicaid savings in the future. The beauty of the reverse mortgage Medicaid savings proposition is that it is easy to understand. If people are incentivized and encouraged to take out a reverse mortgage to pay for their future medical needs, fewer people will go on Medicaid and be a burden on the US government and its taxpayers. Not hard to understand, is it? But today those incentives do not exist and that’s why the penetration rate of reverse mortgages with eligible seniors is fewer than 3%.Accordingly, with that low of a penetration rate coupled with the $2 trillion of home equity held by people 62 and older, the reverse mortgage potential for saving Medicaid dollars is huge. The Reverse Mortgage Program should be nurtured by members of Congress as they act to restore financial responsibility to the US government by fixing the Medicaid program and creating incentives for seniors to take fiscal responsibility for their own future long-term health needs. 2. The debt of the United States in 2011 – US government is at a financial tipping point Here’s a quick primer on economics for countries. Most economists agree that a nation is in trouble
  7. 7. 4 when its formal debt exceeds its annual output of goods and services – it’s GDP. This isn’t an arbitrary measure. When a nation has debt equal to its annual output, the annual cost of interest on the debt is likely to be greater than the annual growth of the economy. To illustrate this, the interest rate on the national debt approximates 4%. If the economy is not growing by a similar amount, a country can slide toward a hopeless debt spiral. That’s what is happening in the United States today. Our formal debt is $14.1 trillion. Our gross domestic product for 2010 is estimated at $14.7 trillion – about the same. So we are already at the flashpoint. The United States economy certainly isn’t growing at a rate anywhere close to the interest rate on the national debt. Accordingly, the country is at a tipping point. And if that news wasn’t bad enough, consider this. As mentioned above, the United States formal debt is $14.1 trillion. But that does not include our informal debts. What are informal debts? They are promises of future benefits – payments – embedded in the entitlement programs like social security, Medicare and Medicaid. They may not be treasury bonds, but most of us regard these programs as very strong promises. People riot when governments default, reneged or even fiddle with promises like these and unfortunately these unfunded liabilities are gigantic. For Social Security, Medicare and Medicaid the unfunded liability exceeds $50 trillion. Add that to the $14.1 trillion formal debt and now you get a real sense of the dire economic reality the United States faces in 2011. And to put this in context, read the respected white paper study published in 2010 by the Bank of International Settlements in Zürich. Titled “The future of public debt: prospects and implications”, the paper examines the formal debt of Austria, France, Germany, Greece, Italy, Ireland, Japan, the Netherlands, Portugal, Spain, the United kingdom and the United States. The shock is that the US is considered in the same sentence with the well- known basket cases of Europe – Greece, Italy, Ireland, Portugal and Spain. We are accustomed to thinking that those are countries we rescue, not countries with similar finances. But the numbers don’t lie. Those are countries have similar numbers to the United States regarding their economies and their debt. 3. Reverse mortgages – political challenges 2011 In the following pages this study will address how reverse mortgages work from the US government’s standpoint and cover the challenges the industry faces with regard to the US government. 1. The economics of the reverse mortgage program- from the government’s standpoint a. Net cash flow from the reverse mortgage program FHA’s reverse mortgage product is an insurance product. FHA takes money in from charging a mortgage insurance premium on the front end of each loan and also a yearly fee for each outstanding loan. That’s the income side of the equation. Regarding the outflow, when a reverse mortgage home defaults and there is a shortfall in the amount of the outstanding loan versus the proceeds from selling the home, FHA covers the shortfall. b. What are the actual performance numbers of the HECM program Over the life of the reverse mortgage program, the reverse mortgage product has reportedly been profitable to FHA every year. However, FHA does not split out for public review the individual components of it’s operations. Accordingly, it’s impossible to ascertain the exact economic performance of FHA’s reverse mortgage program. But with that said, from the inception of the program up to the last couple of years, no one would dispute that the program has historically generated a positive cash flow for FHA and has never been
  8. 8. 5 given a subsidy. This is a very fundamental and important fact to understand. The reverse mortgage program has never been a money losing program for the US government. c. Government accounting – ignores the fact that HECM is an insurance product The government operates on a fiscal year that begins October 1 of each year. Each year FHA prepares a budget that is submitted to Congress. If FHA’s budget reflects that a particular program, such as the reverse mortgage program, will be in the red, then that program will require an approved appropriation from Congress by September 30 of that year for the new year that starts October 1st . This works to the disadvantage of an insurance type program such as a reverse mortgage program because it ignores the fact that the program may have been profitable in prior years and gives no credit for that fact. As an example of this, in February 2010 OMB shared with FHA that it projected that the reverse mortgage program would need a subsidy of $250 million-and therefore the program would need an approved appropriation from Congress for that amount. The program receives no consideration from OMB that it had been consistently profitable in the prior years. d. Summary-economics of the reverse mortgage program When the housing bubble burst in 2008, over the subsequent two years house prices nationwide declined approximately 25%. At the start of 2011, it is projected that the bottom is near and further price declines from this point forward should be limited. Because the reverse mortgage program is directly tied to home valuations, the short-term, self-sustaining viability of the reverse mortgage program has been called into question. In response to this, the reverse mortgage product in it’s 2010 form was seen as a money loser by the government over the next few years. Accordingly, in the third quarter of 2010, FHA raised the back end MIP premium from ½% to 1 ¼% and came out with the new reverse mortgage saver program which is anticipated to be a highly profitable product to FHA. Based on these changes that FHA made to the product in 2010, the program was reassessed by FHA- and for the fiscal year that started October 2010, the program was projected to be profitable and not need an appropriation. But here’s the challenge going forward. In the event that the new “saver” program doesn’t capture 30% market share that FHA desires and projects, it is entirely likely that the program will need an appropriation in the future- maybe as soon as this year for the budget year that starts October 2011. In that case, the industry needs to get the appropriation approved or it will face the threat of a 20% reduction in the amount that can be lent. If this happens, it is projected that the industry will shrink by as much as 40%. Education of the legislative and budgetary process -- how it works Thegovernmentoperatesonafiscalyearthatbegins October 1 of each year. Each year FHA, along with 11 other divisions of the government, prepares a budget that is submitted to Congress. The process starts in the fourth quarter each calendar year. FHA will submit a budget projection to OMB, then OMB will score it and give the budget projection back to FHA sometime in the first quarter of next year- usually in February. At that time FHA will become aware of which programs will be in the red and will require an approved appropriation from Congress. Then through the third quarter of the calendar year, the budgets of each part of the government go before the Appropriations Committees of the House of Representatives and Senate for debate and approval. It is during this process that certain things can be deleted from the budget – such as an appropriation for the reverse mortgage program – if there is not enough political support for it. As an example of this, in February 2010 OMB shared with FHAthat it projected that the reverse mortgage program would need a subsidy of $250 million-and
  9. 9. 6 therefore needing an approved appropriation from Congress for that amount. FHA/HUD’s influence over our program-how they affect it The reverse mortgage program is a very small component of FHA. Since the 2008 mortgage crisis, the FHA footprint in the mortgage industry has increased from 3% to 30%. Due to the recent heavy burden that has evolved, David Stevens, director of FHA, views the reverse mortgage product as a drag on the system, requiring far too many resources to deal with such a small, niche product. How this reality plays out for the industry is as follows. When FHA submits its annual budget, it has to allocate its limited resources. If there is limited support politically for the reverse mortgage product, there is little incentive for FHA to allocate resources to the reverse mortgage program. And if FHA doesn’t internally support the program, the program gets shortchanged in the FHAbudget-even before it sees the light of day and gets presented to members of Congress. So the reality is that the reverse mortgage industry must create long-term political support for the program so that long-term political support is felt by FHA as it sets its priorities and budget. OMB- its role The office of management and budget (OMB) is a part of the executive branch of the government and the White House. It plays a very important role with regard to the reverse mortgage industry. When FHA submits its budget for the forthcoming fiscal year, it first submits it’s budget to OMB in order to score it and determine the amount of subsidy and appropriations each component of the FHA budget will require. OMB used assumptions and projections that are not disclosed to outside sources. These projections include such things as future home price appreciation or depreciation and interest rates, among many other things. OMB will project for FHA the net cash inflow or outflow for the reverse mortgage program. Accordingly, having political support for the program in the White House along is helpful in being able to influence, to some degree, OMB’s projections. Here is an example. Today with reverse mortgages, the investors in the securities that are backed by reverse mortgages report interest income on an accrual basis to the government and pay income tax on the accrued interest. On the flipside, the seniors with reverse mortgages are not able to deduct the interest accruing on their reverse mortgages because, as individual taxpayers, they are on the cash basis for federal income tax purposes. Further, the tax rate for the investors is higher than the tax rate of the individual seniors. In summation, the net benefit that the US government gets from this difference in taxation is between $571 million and $1.13 billion based on projected reverse mortgage loans to be generated in the fiscal year 2011. One can appreciate the significance of this when the projected subsidy needed for the industry in fiscal year 2010 was only $250 million. Summary – reverse mortgage political challenges 2011 The biggest challenge for the reverse mortgage industry in 2011 is to educate members of Congress about what a reverse mortgage is and that it even exists. Most members of Congress have heard about reverse mortgages but surprisingly, know very little about them and how they work. So the first challenge is to educate members of Congress clearly and succinctly as to what a reverse mortgage is. The second challenge is to show members of Congress how reverse mortgages are an ideal solution to the hemorrhaging Medicaid program. As the debate over the next couple years evolves regarding how to get the country back on the path of financial responsibility, members of Congress need to be enlightened that reverse mortgages are the primary solution to the Medicaid problem. And the final challenge is to help members of Congress understand the pure economics of the reverse mortgageprogramfromthegovernmentstandpoint. The key point here is to help them appreciate that in
  10. 10. 7 the temporary times of declining home prices, the economics of the reverse mortgage program suffer. But the reality is that over the last 70 years, periods of declining home prices have been very infrequent. Moderate price increases have historically been the overwhelming norm – and when that’s the case the pure economics of the reverse mortgage program thrive and the program is a net revenue generator for the government. 4. Technology – it’s making it easier to keep seniors in their homes versus going into a nursing home. The digital revolution has changed the world over the last 20 years. And how the digital revolution affects Medicaid is interesting. In the past, when the elderly couldn’t care for themselves, they had to be put in a nursing home – where their vital signs could be monitored and medicine provided by a third-party. But that is all changing. Today and in the future, the digital revolution allows for the practice of medicine and the administration of care to be done remotely. The implications of this with regards to nursing home care and its associated cost is huge. Seniors want to stay in their homes – by an overwhelming majority. But that has not always been possible from a practical standpoint in the past. But this is rapidly changing. And the dynamics of nursing home care will change as well. Huge cost savings are on the horizon for Medicaid because nursing home care is the biggest cost component of Medicaid. As technology evolves and allows more people to stay their home and be monitored and medicated remotely, savings in Medicaid will be substantial. 5. Medicaid - How it works and where are the problems Medicaid is the nation’s principal safety-net health insurance program, covering health and long-term care services for nearly 60 million low income Americans, most of whom would otherwise be uninsured. Medicaid’s enrollees include children and parents in working families, people with dis- abilities, and seniors; many of the nation’s sickest and frailest people depend on Medicaid for their coverage and care. During the recession and as pri- vate insurance has eroded, Medicaid has provided a safety-net for millions of individuals and families who have lost their coverage. Under health reform, Medicaid’s coverage role will increase significant- ly as it is expanded to reach millions more low in- come people, mainly uninsured adults. Since its inception in 1965, Medicaid has improved access to care for low-income people, paid a large share of the nation’s bill for nursing home and other long-term care, and supported the safety-net hospi- tals and health centers that serve low-income and uninsured people. The Medicaid program funds 16% of all personal health spending in the U.S. Medicaid is a federal-state partnership. The federal government and the states share the cost of Med- icaid, and states design and administer their own Medicaid programs within broad federal rules. Who does Medicaid cover? Under current law, to qualify for Medicaid, a per- son must meet financial criteria and belong to one of the “categorically eligible” groups: children; parents with dependent children; pregnant wom- en; people with severe disabilities; and seniors. States must cover individuals in these groups up to specified income thresholds and cannot limit en- rollment or establish a waiting list. Non-disabled adults without dependent children are categori- cally excluded from Medicaid by federal law un- less the state has a waiver or uses state-only dollars to cover them. Finally, among Medicaid’s elderly
  11. 11. 8 and disabled enrollees are more than 8 million in- dividuals who have Medicare too. They are known as “dual eligibles.” Many states have expanded Medicaid beyond federal minimum standards, mostly for children. Many states also cover the “medically needy,” cat- egorically eligible individuals who exceed Medic- aid’s financial criteria but have high medical costs. About of half of Medicaid’s beneficiaries are chil- dren. Non-elderly adults make up one-quarter. The elderly and individuals with disabilities account for another quarter (Fig. 1.) In 2007, Medicaid cov- ered: • 29 million children (1 in every 4) • 15 million adults (primarily poor working parents) • 6 million seniors • 8.8 million persons with disabilities (in- cluding 4 million children) Under health reform, beginning in 2014, nearly ev- eryone under age 65 with income up to 133% of the federal poverty level (FPL) will be eligible for Medicaid. Categorical restrictions will be elimi- nated for this population. These changes establish Medicaid as the coverage pathway for low-income people in the national framework for near-universal coverage laid out in the health reform law. Medic- aid eligibility rules for the elderly and disabled will not change under health reform. What does Medicaid cover? Medicaid covers a wide range of benefits to meet the diverse and often complex needs of the popula- tions it serves. In addition to acute health services, Medicaid covers a broad array of long-term ser- vices that Medicare and most private insurance ex- clude or narrowly limit. Medicaid enrollees receive their care mostly from private providers, and over 70% receive at least some of their care in managed care arrangements. Medicaid programs are gener- ally required to cover: • inpatient and outpatient hospital services • physician, midwife, and nurse practitioner services • laboratory and x-ray services • nursing facility and home health care for individuals age 21+ • early and periodic screening, diagnosis, and treatment (EPSDT) for children under age 21 • family planning services and supplies • rural health clinic/federally qualified health center services In addition, states can elect to offer many “op- tional” services, such as prescription drugs, dental care, durable medical equipment, and personal care services. All Medicaid services, including those considered optional for adults, must be covered for children. Medicaid assists dual eligibles with their Medicare premiums and cost-sharing and covers key benefits not covered by Medicare, especially long-term care.
  12. 12. 9 Generally, the same Medicaid benefits must be covered for all Medicaid enrollees statewide. How- ever, states have some authority to provide some groups with more limited benefits modeled on specified “benchmark” plans, and to cover differ- ent benefits for different enrollees. Premiums are prohibited and cost-sharing tightly is limited for beneficiaries with income below 150% FPL. Less restrictive rules apply for others, but no beneficia- ries can be required to pay more than 5% of their income for premiums and cost-sharing. Under health reform, beginning in 2014, adults newly eligible for Medicaid due to health reform will receive a benchmark benefit package, or a broader set of benefits if a state elects. The health reform law requires that benchmark benefit pack- ages include at least the “essential health benefits” that health plans in the new insurance exchanges will be required to cover. How much does Medicaid cost? Medicaid cost approximately $373.9 billion a year. Medicaid spending is not distributed uniformly across all enrollees.Although the elderly and people with disabilities comprise one quarter of Medicaid enrollees, they account for roughly two-thirds of Medicaid spending. This pattern reflects the higher per capita costs associated with these individuals due to their more intensive use of both acute and long-term services. In 2007, Medicaid expendi- tures were about $14,500 per disabled enrollee and $12,500 per elderly enrollee, compared to $2,100 per child and $2,500 per non-elderly adult (Fig. 2). Medicaid spending is also skewed due to the mix of relatively healthy people and very sick people the program covers. In 2004, the 5% of Medicaid enrollees with the highest health and long-term care costs accounted for over half of all program spending (Fig. 3). About 45% of total Medicaid spending is for dual eligibles. Medicaid spending is distributed broadly across services (Fig. 4). In 2008, 61% of spending was for acute-care services and 34% was for long-term care. About 5% was attributable to supplemental payments to hospitals that serve a disproportionate share of indigent patients, known as “DSH.” Pay- ments for Medicare premiums accounted for 3.5%.
  13. 13. 10 How is Medicaid financed? The federal government and the states share the cost of Medicaid through a matching system. The federal share is known as the Federal Medical Assistance Percentage, or FMAP. Normally, the FMAP is at least 50% in every state but higher in poorer states, reaching 76% in the poorest state, and the federal government funds about 57% of Medicaid costs overall. However, to provide fiscal relief to states during the recession, the American Recovery and Reinvestment Act (ARRA) included a temporary increase in the FMAP. As a condition of receiving the increase, states cannot reduce their Medicaid eligibility levels or use more restrictive methods in determining eligibility. These require- ments help to preserve coverage. With the ARRA adjustment, the FMAP ranges from 56% to 85% for the 27-month period ending December 31, 2010. The enhanced FMAP increases the federal share of Medicaid spending overall to 66%. Under health reform, the federal government will provide substantially increased Medicaid funding to the states. For the first three years (2014-2016), the cost of coverage for new Medicaid eligibles will be 100% federally financed. The federal share will phase down gradually, leveling out at 90% for 2020 and thereafter. Looking ahead As significant a source of coverage as Medicaid is today, under health reform the program will play a much larger and more national role, providing cov- erage to an estimated additional 16 million people. This expanded role presents unprecedented oppor- tunities and challenges. Among the most important are achieving strong participation, ensuring that enrollees have adequate access to care, and devel- oping seamless coordination between Medicaid and the new insurance exchanges. Health reform will provide substantial additional federal funding for Medicaid beginning in 2014. But at present, states continue to face severe bud- get pressures. Resources to help states weather the recession and implement reform are critical. En- hanced FMAP has been an effective vehicle for federal assistance to states through the recovery. Stable, adequate federal help will be important to secure states’ capacity to preserve Medicaid cov- erage and smooth progress toward implementation of the Medicaid expansion and health reform over- all in 2014. A closer look into Medicaid Seventy-seven million aging baby boomers will sink America’s retirement security system if we don’t take action soon. A few years ago, the prob- lem went unrecognized by most Americans. Today, the prospect of a fiscal crisis has forced policymak- ers to focus on solutions. Social Security has center stage these days with a $10 trillion unfunded liability. Medicare is an even greater problem, with $60 trillion in unaccounted- for obligations. The good news is that these massive “social insurance” programs have finally begun to attract the attention of analysts, policymakers, and legislators. Another social program bears scrutiny but receives much less attention. Medicaid is the poor relative among government programs. It is means-tested public assistance-in a word, welfare. While Social
  14. 14. 11 Security and Medicare have spurious “trust funds,” Medicaid draws its financing from general tax revenue without even the pretense of a trust fund. Medicaid is the principal payor for long-term care (LTC), especially nursing home care. LTC is an 800-pound gorilla of social problems that lurks just around the bend. If we wait to deal with Medicaid and LTC until after we handle Social Security and Medicare, it will be too late. At last, we have a window of opportunity to ad- dress the challenges of Medicaid and LTC fi- nancing. Congress has committed to find $10 billion in Medicaid savings over the past five years. Despite the handwringing this has caused, such savings and much more can be achieved while actually improving the program. Medicaid expenditures today exceed the cost of Medicare and continue to skyrocket. Medicaid is the biggest item in state budgets, having topped elementary and secondary education combined for the first time in 2004. Long-term care (LTC) ac- counts for one-third to one-half of total Medicaid expenditures in most states, 35 percent on average. For 2010, total Medicaid expenditures were $373.9 billion. Of this, Medicaid financed nursing home care accounted for approximately $55 billion and home care $47.7 billion. Medicaid LTC recipients consume a disproportion- ate share of total program expenditures. Consider, for example, people who are eligible for both Med- icaid and Medicare. Such “dual eligibles” account for 42 percent of Medicaid spending, although they make up only 16 percent of Medicaid recipients. Dual eligibles are heavy users of LTC and Medic- aid-financed acute care services that are not cov- ered by Medicare. On top of this, Medicaid pays for Medicare premiums and cost sharing for dual eligibles. Aged, blind, and disabled (ABO) individuals-also heavy users of LTC-make up one fourth of Medic- aid recipients but account for two-thirds of program costs, whereas poor women and children make up three-quarters of the recipients but account for only one third of Medicaid expenditures. Clearly, there is an imbalance between the types of people who use Medicaid and the resources spent on them. Key Points and Queries LTC is Medicaid’s most expensive benefit. The heaviest users of LTC~those who are eligible for both Medicaid and Medicare and those who are aged, blind, or disabled-consume a disproportion- ate share of Medicaid’s total resources. Therefore, every actual or potential dual eligible, ABO, or other LTC recipient who is kept from becoming dependent on Medicaid will result in dispropor- tionate savings to the program. In other words, if policymakers can prevent Medicaid dependence for even a small number of these heavy LTC users, the savings would be extraordinarily high. But aren’t dual eligibles, the aged, blind, and dis- abled, and heavy LTC users the poorest of the poor? Isn’t Medicaid their only safety net after a catastrophic spend-down has devastated their life’s savings and driven them into financial destitution? Actually, the truth is not that simple. By confront- ing the true complexity of Medicaid eligibility, we can find the savings, fix the program, and improve LTC for everyone. Examine Your Premises Are people on Medicaid necessarily poor? Only if they’re young and need acute or preventive medi- cal care. But not if their eligibility is based on their being aged, blind, or disabled and in need of LTC. Medicaid’s financial eligibility rules are relatively tight for poor women and children. For people over the age of 65 who have a medical need for nursing- home level care, however, Medicaid’s eligibility rules-contrary to conventional wisdom-are very loose. Income Eligibility Even substantial income is rarely an obstacle to Medicaid eligibility for the elderly who require
  15. 15. 12 LTC. If they have too little income to pay all their medical expenses, including nursing home care, they’re eligible. Medicaid “income eligibility” is determined in one of two ways. According to the Social Security Administration, 35 states and the District of Columbia have “medically needy” in- come eligibility systems. Those states deduct each Medicaid applicant’s medical expenses including private nursing home costs, insurance premiums, medical expenses not covered by Medicare, and so forth-from the applicant’s income. If the appli- cant has too little income to pay for all of these expenses, he or she is eligible for Medicaid-not just for LTC but for the full array of Medicaid’s optional services, which often stretch far beyond what Medicare covers. The remaining states have “income cap” Med- icaid eligibility systems. In those states, anyone with income of $1,737 or less per month (300 percent of the SSI monthly benefit of $579) is eli- gible for LTC benefits. But any additional income makes the applicant ineligible for Medicaid, even though that amount is not enough to pay privately for nursing home care. Thus, Congress approved “Miller income diversion trusts” in the Omnibus Budget Reconciliation Act of 1993 (OBRA ‘93). These special financial instruments allow people to siphon excess income into a trust to become eligi- ble for Medicaid. The trust proceeds must then be used to offset the Medicaid recipient’s cost of care, and any balance in the trust at death is supposed to revert to Medicaid. Nevertheless, Miller income trusts allow people with incomes substantially over the ostensible limit to quality for Medicaid, take advantage of the program’s low reimbursement rates, and receive an extensive range of additional medical services. No one has to be poor to quality for Medicaid. There is no set limit on how much income you can have and still qualify as long as your private medical expenses are high enough or, if you live in an “income cap” state, you have a Miller income diversion trust. All anyone needs to quality for Medicaid is a cashflow problem-that is, too little income after all medical expenses are deducted. Asset Eligibility One might ask, “So what?” Everyone knows that people must spend down their assets before be- coming eligible for Medicaid. Here again the truth belies the conventional wisdom. Medicaid ben- eficiaries can easily retain unlimited assets while qualifying for Medicaid LTC benefits, as long as those assets are held in an exempt form. For exam- ple, Medicaid exempts one home and all contigu- ous property regardless of value. A simple “intent to return” to the home keeps it exempt, whether or not anyone resides in the home or the Medicaid applicant has any objective medical possibility of ever returning. How is this rule used to protect as- sets? Here are some examples: Another sheltering strategy is to convert available, countable assets into noncountable, exempt assets. For example, money in checking or savings ac- counts may be used, without creating a period of ineligibility, to purchase or improve a home, payoff a mortgage ... pre-pay residence-related taxes and insurance, or even pay outstanding bills, including legal fees. Once Medicaid eligibility is established, the com- munity spouse may acquire unlimited assets in her own name. Such assets might be received by gift, inheritance, or by selling the home and, thereby, converting an exempt asset into a non-exempt asset (cash) with impunity.” Atransfer of the home with reserved special powers of appointment can provide the best of all possible worlds. It can completely protect the home from the reach of Medicaid after the applicable waiting period while allowing the powerholder to retain control of the property and preserve all desirable tax benefits with no exposure to estate recovery.17 Medicaid also allows an exemption for one busi- ness, including the capital and cash flow of unlim-
  16. 16. 13 ited value. How is this rule used to protect assets? Here are some examples: A new amendment to the Social Security Act al- lows an exemption for the family business, farm or ranch from countable assets for Medicaid eligibil- ity. The advocate should take maximum advantage of this exemption to achieve immediate or very rapid eligibility for clients in need of Medicaid as- sistance. A considerable amount of resources can be excluded including the value of land and build- ings, equipment, livestock, inventory, vehicles, and liquid resources used in the business. The attorney should also counsel his clients on the best method of transferring the business, farm or ranch to avoid the imposition of liens and recovery from the estate for amounts spent for Medicaid.19 For farm and ranch families, the Medicaid planning strategy may consist of transferring the farm to the children in full with the children then renting the farm back to the parents. The parents would then act as tenants under a lease with the children.... The appropriate Medicaid planning strategy for a client who is the holder of closely held stock in a fam- ily owned corporation may be to work the poten- tial Medicaid applicant into a minority position by making a series of gifts during life outside of the applicable look-back period until the applicant is in a minority position. Then, the strategist should argue that the applicant is no longer able to sell the stock and therefore should be immediately eligi- ble for Medicaid benefits. This strategy allows the practitioner to preserve the asset in question for the applicant and the applicant’s family.20 Medicaid exempts one home and all contiguous property regardless of value. Aprepaid burial space is another excluded resource, regardless of value. This includes improvements or additions to such spaces as well as contracts for care.21 Medicaid eligibility workers often suggest prepaying burial expenses to expedite Medicaid eligibility. Whole life and other kinds of life insurance that build equity are limited to a cash-surrender value (i.e., the amount that the policy holder can collect by voluntarily terminating the policy) of $1,500. Bur one can hold unlimited term life insurance with no effect on eligibility.22 Because the proceeds of a life insurance policy pass to beneficiaries outside a probated estate, not only can a term life policy shelter large assets from Medicaid eligibility lim- its, it can also be used to avoid estate recovery. Home furnishings are officially excluded regard- less of value. Personal property that is held for “its value or as an investment” is a “countable resource.” However, such assets are not usually counted, because Medicaid eligibility workers rarely verify whether such property is held for the purpose of investment or hiding assets.” In fact, Medicaid eligibility workers often suggest that applicants purchase new or additional household goods to minimize the amount they have to spend down and expedite Medicaid eligibility. One car of unlimited value is exempt, assuming it is used to transport the Medicaid recipient or a member of the recipient’s household.24 And be- cause it is exempt, giving it away is not a transfer of assets to qualify for Medicaid, so the applicant can give one car away, buy another, give it away, and so on until he or she reaches the $2,000 eligi- bility threshold for nonexempt assets. That’s called the “two Mercedes” rule. How are these rules used to protect assets? Here are some examples: [A] common misconception among applicants is that excess resources must be spent only on doc- tors, hospitals, nurses, medication, and nursing homes. Nowhere in the law is this indicated. Quite literally, an applicant could spend all of his or her
  17. 17. 14 assets on something “frivolous,” such as a 90th birthday celebration ... and this should not be cause for denial of Medicaid, because the applicant re- ceived “value” for his or her money.25 The real goal ... is to work with your parents on an asset-shifting plan that will allow them to have Medicaid pick up the tab for their long-term care if need be .... Planners also suggest shrinking the total assets your parents have to begin with. One way to do this is by turning assets that aren’t exempt from Medicaid into those that are. Money in the bank or a certificate of deposit could be spent on a prepaid funeral or a more extravagant engage- ment ring, for example; both are exempt assets.26 Another tactic is to spend the assets on property that won’t count for Medicaid purposes ... [such as] a home ... a new car ... household goods ... funeral expenses ... and ... a burial plot ... A client can also reduce his net worth by spending money on travel, which many elderly people enjoy.27 According to one press account, elder law attor- ney Howard Black, of Westbury, New York, sug- gested this technique to qualify for Medicaid: “if the individual happens to have about $82 million lying around, he or she could even buy a painting by Renoir to hang on the walls of the house,” a strategy he calls ‘’’burying money in the treasure chest of the house.”’ Married couples are given even higher income and asset protections than single people, including up to $2,377.50 of monthly income and up to $95,100 of assets for the community spouse as of 2005.29 How is this rule used to protect even more income and assets? Here is an example: A potential planning technique would be for the community spouse to reallocate his or her assets into forms that pay less income. For example, mon- ey market funds could be used to buy zero coupon bonds, gold, or growth stocks, all of which pay no income at all. The community spouse could then legitimately argue that be or she requires a larger allocation of income up to the Monthly Mainte- nance Needs Allowance. Medicaid allows an exemption for one business, including the capital and cash flow of unlimited value. In spite of these generous special exclusions and exemptions, married couples are frequently ad- vised to consider qualifying for Medicaid by get- ting a divorce. Divorce is one of the more extreme Medicaid plan- ning strategies. A successful divorce, in which both parties are represented by independent counsel, and containing an agreement in which most or all of the couple’s assets are given to the community spouse, can result in almost immediate Medicaid eligibility for an institutionalized spouse. The divorce option will likely become increasing- ly attractive to the current generation of wealthy babyboomers as they near retirement age. They can hardly be expected to willingly give up the standard of living to which they have grown ac- customed just because their spouse has suffered a catastrophic injury or illness that requires full-time medical care in a nursing home. It is unlikely that the current generation will feel it is beneath them to preserve their hard earned assets by taking advan- tage of poorly drafted Medicaid legislation.’ Bottom line, there is no limit to how much wealth people can stash in exempt assets or jettison by means of a calculated divorce settlement to be- come eligible for Medicaid LTC subsidies. Medicaid Estate Planning On top of these already generous income and as- set limits, professional Medicaid planners- includ- ing attorneys, financial planners, accountants, and some insurance agents-use other techniques to protect additional hundreds of thousands of dollars
  18. 18. 15 for more affluent clients and their heirs. Such tech- niques include gifting strategies, annuities, trusts, life-care contracts, and dozens of others delineat- ed in hundreds of books, law journal articles, and the popular media. The proceedings of the annual symposia and institutes of the National Academy of Elder Law Attorneys are a rich repository of the creative and highly profitable methods of Medicaid planning. Hundred, of articles, legal treatises, and books spanning the past three decades are readily avail- able in any law library. I have personally pub- lished over 100 columns describing the practice and techniques of Medicaid planning.33 To obtain even more references, one can simply conduct an Internet search for “Medicaid planning” and find more than two million links to sources, methods, and purveyors of artificial self-impoverishment techniques. Similar techniques allow people with substantial income and assets to avoid Medicaid’s ostensibly mandatory estate recovery rules, al- though states rarely enforce these rules effectively. Here’s how a Medicaid planner described the pro- cess to the Department of Health and Human Ser- vices’ Office of Inspector General in 1988: For a fee of $950, I guarantee eligibility within 30 days... I change the ownership of all property in- cluding life insurance policies, car titles, mobile homes, residences and other real property, bank accounts, certificates of deposit, stocks, govern- ment or private bonds, and anything else. Property transfers go from the ill to the well spouse... If a contract or deed of trust is involved, I do an assign- ment so that the income becomes separate to the well spouse. I help them buy burial plots and other exempt property. The techniques and practices of Medicaid estate planning have changed little since this account was published 17 years ago. What has changed is the cost in legal fees to qualify someone for Medicaid LTC benefits virtually overnight without “spending down.” Today, Medicaid eligibility can be bought for a legal fee equal on average to one month in a private nursing home. That’s roughly $5,000 or $6,000 - very cheap insurance for LTC, especially when it can be purchased after the insurable event occurs. Medicaid Spend-Down If Medicaid eligibility rules are so generous, why do so many Americans spend down into impover- ishment before they become eligible for benefits? The answer is, they don’t. Dozens of so-called “Medicaid spend-down”studies were conducted in the late 1980s and early 1990s that showed that spend-down was much less common than previ- ously believed. Before those studies, academics as- sumed that one-half to three-quarters of all people in nursing homes had been admitted as private-pay patients and spent down until their life savings were consumed. Since the spend-down studies, howev- er, we have known that the actual figure is less than one-quarter of nursing home residents who begin as private-pay patients and later convert to Medic- aid. And, because none of those spend-down stud- ies distinguished between people who spent down the conventional-wisdom way (writing big checks to a nursing home every month) and people who spent down the Medicaid planning way (writing one check to an elder law attorney), we have every reason to believe that genuine catastrophic spend down of real personal assets is even less than those studies indicated. Out-of-Pocket Spending If there is no reason to spend down assets, then why is such a large proportion of LTC spending composed of out-of-pocket expenditures? Again, the answer is, it isn’t. Because Medicaid patients have to contribute their Social Security income to- ward their cost of care, the percentage of nursing home costs paid out of pocket is really much less significant than it appears. The Centers for Medi- care and Medicaid Services (CMS) reports that out-of-pocket spending accounted for 27.9 percent of nursing home care spending in 2003 (down from 38.5 percent 15 years earlier). Nearly half of those
  19. 19. 16 out-of-pocket expenditures are actually the recipi- ents’ Social Security income, which the recipients are required to contribute to the cost of their care under Medicaid. That is to say, what is usually as- sumed to be spend-down of life savings is largely just money transferred from one government pro- gram (Social Security) to another government pro- gram (Medicaid). Back out the other major sources of nursing home financing as well, and one is left with only one dollar out of 7 (14 percent) spent for nursing home care that could even possibly be coming from people’s life savings. Fully 86 percent of all nursing home expenditures come from direct government funding (Medicaid and Medicare) plus indirect government funding(spend-through of So- cial Security income by people already on Medic- aid) plus private health insurance, and much of the remainder comes from personal income other than Social Security (i.e., not from assets). There simply is no evidence of widespread catastrophic spend- down of personal assets for LTC. Bottom Line Medicaid is not primarily an LTC safety net for people who have spent down into impoverishment. Rather, it is the principal pay or of LTC for nearly everyone regardless of economic status. Medicaid provides fewer than half the dollars expended for nursing home care but covers two-thirds of nursing home residents. And because Medicaid residents have the longest stays, the program touches more than 80 percent of all nursing home patient days. Home care is no different. Only 17 percent of home health care costs were paid out of pocket in 2003. The remainder comes from Medicaid, Medicare, and private health insurance. The fundamental problem with LTC financing is that government pays for so much of it that the pub- lic 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 (see below) to finance LTC? Is it any wonder that most Americans who need LTC end up dependent on Medicaid? Building on the Facts How can we use these facts to save Medicaid as an LTC safety net, restrain its rising tax burden, and improve the program in the process? One thing is certain: as long as Medicaid exempts unlimited as- sets, most people will not spend their own money on LTC or buy private insurance. A good first step would be to ask: what is the single biggest asset that Medicaid protects from LTC costs? As dis- cussed above, Medicaid exempts the home and all contiguous property, regardless of value, for both nursing home and home care recipients. How is that fact significant? According to the Na- tional Council on the Aging, 81 percent of Ameri- ca’s 13.2 million households aged 62 and over own their own homes. Seventy-four percent of those se- nior homeowners own their homes free and clear. Altogether, seniors own nearly $2 trillion worth of home equity. That wealth is illiquid, is largely untapped for, is totally exempted from Medicaid eligibility limits, and is usually protected against Medicaid estate recovery. What would happen if home equity, or at least part of it, were at risk for financing LTC? There are ways to liquefy this wealth and put it to use financing quality LTC for frail and chronically ill seniors, without compelling people to leave or sell their homes. Reverse mortgages, for example, al- low people to convert illiquid home equity into us- able income or assets. Essentially, the homeowner borrows against his home equity, and the lender makes payments to the homeowner based on the homeowner’s age and the value of the home. The payments continue as long as the borrower occu- pies the property. After that, the loan becomes due. Altogether, seniors own nearly $2 trillion worth of home equity. Reverse mortgages allow seniors to spend their
  20. 20. 17 home equity any way they see fit and still remain in their homes as long as they are physically able to do so. Forty-eight percent of households aged 62 and older could get $72,128 on average from reverse mortgages. “In total, an estimated $953 billion could be avail-able from reverse mortgages for immediate long-term care needs and to promote aging in place.” Placing home equity at risk before granting access to Medicaid LTC benefits would relieve the fiscal pressure on Medicaid. Yet reverse mortgages are rarely used to finance LTC today, because Medicaid obviates the need to tap home equity for that purpose. Placing at least some home equity at risk before granting access to Medicaid LTC benefits would substantially relieve the fiscal pressure on Medicaid, create a stronger incentive for people to purchase private LTC in- surance, and add significantly to the number of market-rate private payers that LTC providers so desperately need. Home equity is the single largest asset protected from LTC spend-down by Medicaid, but there are many others that could also be tapped to relieve the financial burden on Medicaid and enhance private financing sources. As discussed above, those assets include one business, burial spaces for the whole family, household furnishings, a car, and term life insurance. Do those assets amount to much? Take just one category for example. In a study the Center for Long-Term Care Financing conducted on behalf of the Nebraska State Legislature, state eligibility workers estimated that more than 80 percent of the state’s 9,800 Medicaid LTC recipients had exempt- ed a total of $51 million for prepaid burials, for an average of $6,505 per recipient. If this were true for the country as a whole, it would mean nearly $7 billion is diverted from LTC funding at any given time to prefund burials. Is it good public policy to use scarce Medicaid re- sources to indemnify heirs of recipients against the cost of burying their parents? How much could be saved if Medicaid only exempted $1,000? What if Medicaid placed reasonable limits on all the as- sets the program currently exempts with-out limit? Is Medicaid’s proper role to protect inheritances or to provide access to quality LTC for the genu- inely needy? Those and many other difficult tech- nical, ethical, and political questions need to be answered. But to date, the questions have almost never even been asked. The Solution When the problem of Medicaid and LTC financ- ing is properly understood, its solution is obvi- ous. Most people will not pay for something the government is giving away. This is true unless and until the product government gives away is so un- desirable that people will spend their own money to obtain a better service. That is already beginning to happen as consumers gravitate toward privately financed home care and assisted living to avoid or postpone Medicaid-financed nursing home care. Medicaid has a dismal reputation for problems of access, quality, reimbursement, discrimination, and institutional bias. This is well-established in the literature, which is replete with comments like the following: Nursing homes whose patients are mostly private generally provide higher-quality care than facilities dependent on Medicaid patients. It is usually easier to enter a nursing home of your choice if you are a private pay patient than if you are on Medicaid. Because the Medicaid approved rate of payment is lower than what the nursing home charges private pay patients, many nursing homes are reluctant to accept Medicaid patients. After you are in a nursing home, you may later qualify for Medicaid and remain at the facility. Once you
  21. 21. 18 are on Medicaid, the reluctance of some nursing homes to accept Medicaid patients may make it difficult for you to transfer to another facility, even though discrimination is illegal. . . .Nursing homes are not supposed to discriminate against patients who go on Medicaid. However, some states do al- low Medicaid patients to be assigned to a separate wing of the nursing home, or to be discharged to another nursing home if no Medicaid bed is avail- able. If you have to receive acute care in a hospital, the nursing home will keep your Medicaid bed for you for a limited time. If this period expires, the nursing home may not readmit you. If we do nothing, the quality of Medicaid-financed LTC will continue to deteriorate. If we allow the current financing system to collapse entirely, there will be no way left for people to obtain access to quality LTC at any level except to pay privately. When that time comes—certainly within 20 or 30 years and probably sooner—there will be no place for aging boomers to go for the private resources to purchase their LTC except their home equity. If that is where we will end up by sustaining or expanding the status quo, why not spare the Ameri- can public that pain by implementing policies that place home equity at risk for LTC now? This would not force people to use their home equity, but it would provide the necessary incentive for Ameri- cans to protect against this financial risk as they do against other financial risks: by purchasing private insurance. Achieving that objective does not require forcing anyone to do anything. This is America. We should not compel people to buy insurance or take out a reverse mortgage. But neither should we use a pub- lic welfare program to indemnify heirs against the cost of providing their parents with quality LTC. With their inheritances at risk for LTC, adult chil- dren will pull together to help their parents obtain quality care or to purchase insurance instead of fighting over the Medicaid planning spoils, as the current system encourages. Recommendations To fix the current dysfunctional LTC financing sys- tem, the following steps should be taken: If we do nothing, the quality of Medicaid-financed LTC will continue to deteriorate. 1. Pass a congressional resolution stating that Medicaid should be a safety net for the poor— and only the poor. This would signal that it is Congress’s intent to restore Medicaid to its origi- nal mission, and it would help blunt the Medicaid planners’argument that if Congress didn’t want the wealthy on welfare, it wouldn’t have put the loop- holes in the law. Here’s an example of that argu- ment from two prominent Medicaid planning attor- neys: “The mere fact that Congress and the states have enacted statutes and regulations expressly permitting and endorsing Medicaid planning is clearly an expression of the public policy to allow such planning.” 2. Eliminate all or most of Medicaid’s open-ended home equity exemption for LTC recipients. De- nying public assistance until home equity is con- sumed for LTC will not force anyone to leave or sell their homes. Families may choose to (1) sup- port their elders and keep the home in the family, (2) rent the house (in lieu of consuming the equity) to pay for the elders’ LTC, (3) sell the house and spend down to purchase top-quality care, or (4) get a reverse mortgage to liquefy home equity for that purpose. Paying privately, seniors will have better access to a wider range of higher-quality services. 3. Place reasonable limits on the amounts of oth- er assets that people can shelter while qualifying for Medicaid LTC benefits. It is inappropriate and unethical to shelter assets for the purpose of quali- fying for public assistance intended for the poor. The current unlimited exemptions for assets such as a business, a car, home furnishings and improve- ments, prepaid burials for the whole family, and term life insurance should be limited. Reasonable
  22. 22. 19 limits on these exemptions would give adults more incentive to plan responsibly for their parents’ and their own LTC needs. And while the courts have held that lawyers cannot be held criminally liable for advising non-poor clients to take advantage of Medicaid, state bar associations can hold their members to a higher standard by declaring such practices unethical and grounds for disbarment. 4. Extend the look-back period for asset transfers to 10 years for most property and 20 years for real property. States are required to determine if Med- icaid applicants made asset transfers for less than fair market value for the purpose of becoming eli- gible. The “look-back” period refers to how many years prior to an individual’s Medicaid application the state examines such transfers. The look-back period is currently three years for most assets, and five years for transfers to trusts. If a state finds that assets were transferred for less than fair market value during those periods, the state is supposed to delay the applicant’s Medicaid eligibility date by one month for each month the applicant could have paid privately for nursing home care. Yet many ap- plicants get around the look-back period by plan- ning their asset transfers over three years (or five years in the case of trusts) in advance of applying for Medicaid when they know LTC is imminent. (The aver-age period of time from onset to death in Alzheimer’s disease, for example, is eight years.) However, few would want or be able to game the system 10 or 20 years in advance. Transfers of real property would be much more easily tracked than transfers of personal property because the former are publicly recorded. If individuals need to pre- pare for LTC long enough in advance, they will be much more likely to plan responsibly by purchas- ing insurance when they are younger, still medi- cally insurable, and financially able to do so. Congress should eliminate a ll or most of Medicaid’s open-ended home equity exemption for LTC recipients. 5. Appoint a commission of legal experts to study the practice of Medicaid estate planning, and rec- ommend further reforms. The commission should review the extensive legal literature on the subject, monitor the conferences and publications of the National Academy of Elder Law Attorneys (the Medicaid planners’ trade association), and prepare recommendations on how to curtail the most egre- gious Medicaid planning techniques, such as trusts, annuities, life care contracts, life estates, “spousal refusal,” and so forth, that are routinely used to im- poverish affluent seniors artificially. There is no need to reinvent the wheel, however. Ten years ago, Medicaid LTC scholars Brian Bur- well and William Crown suggested many specific measures for Congress to consider, all of which still deserve serious consideration. These options in- clude numerous modifications to complicated pro- visions of OBRA’93, which implemented the most recent set of far reaching changes to Medicaid LTC eligibility requirements made by Congress.For ex- ample, Congress should do the following: • Reconsider the special new trusts created by OBRA’93, particularly a provision that allows transfers from the community spouse to a third party “for the sole benefit of the community spouse,” also known as “sole-benefit trusts.” • • Eliminate the “half-a-loaf” strategy, which allows people to transfer half their assets, spend down the other half during the resulting eligibility penalty period, and become eligible for Medicaid in half the time originally intend- ed by Congress. • Apply transfer-of-assets penalties to all trans- fers done for the purpose of establishing eligi- bility for Medicaid or avoiding estate recov- ery, including transfers that shift wealth from nonexempt assets to exempt assets. • Prohibit the “spousal refusal” or “just-say-no” gambit. “Another asset preservation strategy is for a community spouse to ‘just say no’ to paying for the other spouse’s nursing home care. Say Mrs. Jones holds more money than the state allows for her husband to qualify for
  23. 23. 20 Medicaid coverage. If it can be shown that she simply refuses to spend her money on her husband’s care, Medicaid coverage will be allowed for Mr. Jones if other easily met requirements are satisfied. This approach has been particularly successful in New York.” • Explicitly empower state Medicaid estate re- covery programs to recover from the estates of surviving spouses of deceased Medicaid recip- ients. OBRA ’93 required states to implement Medicaid estate recovery programs. States are not allowed, however, to recover from a recip- ient’s estate until after the death of a surviving spouse. Some courts have interpreted this to mean that the recipient’s cost of care can be re- covered from the estate of a surviving spouse. Other courts have held otherwise. Congress should clarify this point. • Eliminate the “resources-first” option for rais- ing the Community Spouse Resource Allow- ance. Federal law allows states to use either an “income-first” or a resources-first method of determining the community spouse’s resource allowance and monthly maintenance needs allowance. Under the income-first approach, the institutionalized Medicaid recipient’s in- come is transferred to the community spouse in amounts sufficient to bring the community spouse up to the amount the state determines that spouse needs (i.e., his or her “maintenance needs allowance”). Under the “resources first” approach, the Medicaid recipient is allowed to transfer assets above the limits otherwise pre- scribed for the Community Spouse Resource Allowance. The resources-first approach in- vites abuse because it allows the Medicaid re- cipient to transfer substantial excess resources to the community spouse, thus becoming eli- gible more quickly and spending down less. It allows the community spouse to seek the low- est possible return on invested capital for the purpose of maximizing the assets transferred without exceeding the maintenance needs al- lowance, a perverse result as compared to sen- sible financial planning. In some cases, such methods have been used to shelter more than $200,000 in assets above the limit of $95,100 that would otherwise apply. • Require liens on exempt real property as a condition of receiving Medicaid LTC benefits. The Medicare Catastrophic Coverage Act of 1988 made transfer-of-asset penalties manda- tory under federal law. OBRA ’93 made es- tate recoveries mandatory. Liens on real prop- erty ensure that the property remains in the estate so that it can be recovered. State use of such liens is still voluntary under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA ’82). The absence of TEFRA liens in many states means that real property, includ- ing exempt homes, often disappears during a recipient’s time on Medicaid and is therefore not avail-able for estate recovery. Mandat- ing liens on real property would help to keep home equity in the recipient and spouse’s es- tate for recovery. • Change the “intent-to-return” rule so that homes remain exempt assets only so long as the recipient can reasonably be expected to return home based on his or her medical con- dition. Medicaid rules currently allow a home to remain exempt indefinitely as long as the recipient or a personal representative claims the intent to return. The intent is entirely sub- jective; the home remains exempt even if it is vacant and it is medically impossible for the recipient to return. These measures would postpone or eliminate Medicaid dependence for many Americans. These measures would postpone or eliminate Med- icaid dependence for many Americans. How much could these public policies save? Medicaid spent $91 billion on 7.2 million dual eligibles in 2002, or $12,646 per dually eligible recipient. To save $20 billion per year, Medicaid would only need to re- duce the number of dual eligibles by approximate- ly 1.6 million, or 22 percent. Rodney Whitlock of
  24. 24. 21 the Senate Finance Committee staff believes the potential savings to Medicaid are even greater. In a speech to the National Conference of State Leg- islatures, he said that based on Congressional Bud- get Office numbers, Medicaid could save $160 bil- lion between 2011 and 2015 (the second five-year portion of the current 10-year budget window) by diverting only one-third of the people who would otherwise have ended up on Medicaid in nursing homes to private-pay status instead. Are such large potential savings in Medicaid’s long-term care budget feasible? They are if, as NCOA reports, half of households headed by peo- ple over 62 could get over $70,000 each from a reverse mortgage. When added to other income and assets people would retain, those funds could delay or prevent Medicaid dependence for millions of Americans. Understand, of course, that savings of this magni- tude would not come from eliminating eligibility for current dual eligibles. Most of them are poor and lack home equity. The savings will come over time by preventing people from becoming “im- poverished” Medicaid dependents. The proposed changes in eligibility rules would eliminate the perverse incentives that discourage responsible LTC planning. They would create strong positive incentives for people to purchase private LTC in- surance while they are still able to qualify medi- cally and financially. Whether or not one accepts much larger estimates of potential savings, changes to Medicaid like those recommended above would easily save the $10 billion that Congress is trying to save over five years. In fact, it is reasonable to conclude that such changes, if implemented, would save enough to fund the cost of an above-the-line tax deduction for private LTC insurance and/or the cost of funding a national LTC Partnership program. That program, originally sponsored by the Robert Wood Johnson Foundation, allows individuals to exempt assets above the usual $2,000 limit if they have purchased LTC insurance. The program exists in only four states and has languished since OBRA ’93 denied its participants exemption from estate recovery. Legislation has been proposed that would elimi- nate that restriction and lead to rapid expansion of the LTC Partnership program. These measures would pay dividends overtime as more and more people buy insurance, pay privately for LTC, and avoid Medicaid dependence. It is also worth mentioning that healthy markets for LTC in- surance and reverse mortgages would mean more jobs, more tax revenue, and hence more resources to operate Medicaid as a safety net for the genu- inely needy. The savings will come over time by preventing people from becoming “impoverished” Medicaid dependents. Conclusion about Medicaid Medicaid is supposed to be America’s LTC safety net for the poor. Instead, it is the principal LTC pay or for nearly everyone. Medicaid’s LTC benefit has become “inheritance insurance” for baby boomers, lulling them into a false sense of security regard- ing their own future LTC needs. Medicaid’s loose eligibility rules for LTC create perverse incentives that invite abuse and discourage responsible LTC planning. The conventional wisdom that most peo- ple must spend down their life savings before they qualify for Medicaid LTC benefits is a myth. If people’s biggest asset, their home equity, were at risk to pay for LTC, most people would plan early to save, invest, and insure against that risk. Reverse mortgages permit people to withdraw supplemen- tal income or assets from their otherwise illiquid home equity without risking use of the home. This extra cash can purchase services to help them re- main at home and delay Medicaid dependence—or avoid it altogether. The single most effective step Congress and the president can take to fix Medic- aid, reduce its cost, and improve the quality of LTC
  25. 25. 22 would be to replace Medicaid’s wide-open home equity exemption with a more limited exemption of home equity or none at all. With that one change in effect, families would pull together to fund quality LTC for their elders, rather than fighting over the spoils of Medicaid-planning abuse as they do now. That simple measure com- bined with other, lesser modifications would pump desperately needed oxygen into LTC markets, ease the tax burden of Medicaid, enable Medicaid to provide better access to higher-quality care for the genuinely needy, and supercharge the market for LTC insurance and home equity conversion prod- ucts. Everyone will be better off, with the excep- tion of legal experts who currently profiteer on Medicaid’s extravagantly loose eligibility rules. 6. Reverse mortgages and long-term care Most older Americans would prefer to “age in place” in their own homes. The high proportion of long-term care paid by government, however, suggests that few seniors can afford to pay these costs for very long. Until recently, older homeown- ers had limited options for improving their finan- cial situation: they could sell the house, or if they had adequate incomes, they could take out a first or second mortgage. A new solution is to tap the equity built up in the home. In the United States, a reverse mortgage is the prin- cipal financial tool available to seniors who want to convert some of their home equity into cash. Reverse mortgages can give older homeowners the funds they need to pay for long-term care and other expenses, while allowing them to continue living in their own homes. For policymakers, reverse mort- gages can be an important source of new funds to help strengthen efforts to increase personal respon- sibility for long-term care and promote home and community-based services. This section examines the basic features of re- verse mortgages and how they can be used to pay for long-term care. Included is a description of the characteristics of today’s borrowers, along with an overview of consumer awareness and attitudes toward reverse mortgages. The features of Home Equity Conversion Mortgages (HECMs) that may limit the use of this product to pay for long-term care are also discussed. Basic features of reverse mortgages A reverse mortgage is a special type of loan that al- lows homeowners age 62 and older to convert some of the equity in their homes into cash. These types of loans are called “reverse” mortgage because the lender makes payments to the homeowner. Since the loan is based on the equity in the home, lenders do not consider the borrower’s income, or credit and medical history in determining eligibility for a reverse mortgage. In order to qualify for a reverse mortgage, a hom- eowner should own the home free and clear or have significant equity in the home. The reverse mort- gage must be the primary debt against the home (“first” mortgage). Homeowners must first pay any outstanding amount owed on the home, either be- fore applying for the reverse mortgage or by taking a lump sum advance from the loan. The home must be the borrower’s primary resi- dence. Eligible properties include owner-occupied one-to-four-family homes, manufactured homes, federally-approved condominiums or planned unit developments (PUD), and cooperative housing units. Consumers usually obtain a reverse mortgage through a mortgage lender. Some credit unions and banks, along with state and local housing agencies, may also offer these loans. Before closing, loan applicants must have the house appraised to deter- mine its value and to make sure that it meets FHA minimum property standards. In cases where the home needs repairs, homeowners can finance the cost of these repairs as part of the loan. Reverse
  26. 26. 23 mortgage borrowers continue to own the home and are responsible for paying property taxes, hazard insurance, and maintenance of the home. The amount that a homeowner can borrow is based primarily on the age of the youngest homeowner, the value of the home, and the current interest rate. Older owners (because of their limited life expec- tancy) and those with more expensive homes are able to get higher loan amounts. Borrowers can select to receive payments as a lump sum, line of credit, fixed monthly payment (for up to life), or a combination of payment options. Proceeds from a reverse mortgage are tax-free, and borrowers can use these funds for any purpose. Interest on a re- verse mortgage is not deductible for tax purposes until it is actually paid at the end of the loan. Unlike conventional mortgages, there are no in- come requirements for these loans. In addition, reverse mortgage borrowers do not need to make any payments for as long as they (or in the case of spouses, the last remaining borrower) continue to live in the home as their primary residence. When the last borrower permanently moves or dies, the loan becomes due. Interest accrues at a compound rate on the outstanding loan balance. The amount of debt borrowers owe on a reverse mortgage equals all the cash they receive from the loan (including funds used to pay for closing costs, required home repairs, or to pay off existing debt), along with the interest that has accumulated on the loan bal- ance. When the loan becomes due, borrowers or their heirs may elect to repay the loan and keep the house, or sell it and keep the balance remaining after paying off the reverse mortgage. Types of reverse mortgages The amount of money that borrowers can get de- pends on the reverse mortgage product they select. The HECM program is offered by the Department of Housing and Urban Development (HUD) and run by the Federal Housing Administration (FHA). Borrowers can select to receive HECM payments as a lump sum, line of credit, fixed monthly pay- ment (for up to life), or a combination of payment options. Borrowers can change payment options at any time for a small fee. Any unused funds in the HECM line of credit grow by a certain percentage per annum (equal to the interest rate on the loan). Consumer protections There are many protections in place for people who decide to take out a reverse mortgage. Federal Truth-in-Lending law requires that reverse mort- gage lenders disclose the projected average annual cost of the loan. Borrowers can cancel the loan for any reason within three business days after closing. They must notify the lender in writing to terminate the reverse mortgage. The costs that reverse mortgage borrowers pay are similar to those of a traditional home loan or to refi- nance an existing mortgage. These include an orig- ination fee, appraisal fee, and third-party closing costs (fees for services such as an appraisal, title search and insurance, surveys, inspections, record- ing fees, etc.). Most of these upfront costs are regu- lated, and there are limits on the total fees that can be charged for a reverse mortgage. Since most of these costs can be financed as part of the loan, bor- rowers typically face few out-of-pocket costs for a reverse mortgage (typically the appraisal fee and credit check to make sure that the borrower is not delinquent on any other federally insured loans). All reverse mortgages are non-recourse loans, which mean that the borrower or heirs never owe more that the value of the home at the time of sale or repayment of the loan. This important feature is especially critical to surviving spouses who might otherwise be impoverished due to the cost of the loan. To receive this protection, HECM borrowers pay a mortgage insurance premium. Mortgage in- surance offers additional security to both borrow- ers and lenders. Borrowers are protected against default by lenders. Lenders avoid losses that arise when the HECM loan balance exceeds the value of the home at the time of sale (“crossover risk”). FHA insures reverse mortgages issued under the
  27. 27. 24 HECM program. Borrowers who apply for any reverse mortgage must first receive independent counseling before they complete the loan applica- tion. This helps ensure that borrowers understand the advantages and limitations of this type of loan, and are aware of possible alternatives to reverse mortgages. Counselors must work for a HUD- approved agency and receive special training on reverse mortgages. Currently, there are about 800 approved HECM counseling agencies. Counselors offer this information in person or by telephone. The AARP Foundation has developed a national certification program for reverse mortgage coun- selors. Consumer awareness of and attitudes toward reverse mortgages A significant number of older Americans are aware of this product. A national survey by AARP found that 51 percent of respondents age 45 and older had heard of a reverse mortgage. Awareness of these loans was particularly high in the 65-74 age group (63 percent).About one in five (19 percent) respon- dents age 45 and older indicated that this is an idea they might consider in the future. Results of the consumer survey conducted for the Blueprint also indicate that there is significant awareness of reverse mortgages. Based on our tele- phone interviews of senior homeowners and adult children of senior homeowners: • About two-thirds of senior respondents (67 percent) had heard of a reverse mortgage, as had 53 percent of adult children respondents. • Of those that were aware of reverse mortgag- es, only 28 percent of seniors and one-third of adult children (34 percent) indicated that they are familiar to very familiar with this product. One of the research gaps addressed by this study was to evaluate consumer reactions to using home equity specifically for long-term care. When asked whether they would make use of a reverse mort- gage to pay for the help they need to continue to live in their home, one in four seniors (25 percent) reported that they would be at least moderately likely to do so. About 9 percent reported that they would be likely to tap home equity to pay for as- sistance at home. Only 4 percent of senior respon- dents indicated that they regarded this as a very likely option. To examine generational differences in attitudes toward reverse mortgages, the telephone inter- views also included adult children of seniors who are homeowners. Family and friends are often the main source of financial advice and knowledge for households`. Children can have a significant impact on the decision to take out a reverse mortgage. Ho- meowners with children may be more concerned to preserve the home in order to leave a bequest. Adult children, however, may prefer to have their parents tap home equity so they can continue to live independently. The telephone interviews found that only about one in four (22 percent) adult children is comfort- able with the idea of using a reverse mortgage for long-term care. A smaller proportion (8 percent) feels it is likely/very likely that their parents will select this financing option. When it comes to mak- ing a decision to use home equity, 15 percent indi- cated that it is up to their parents to do what they want. Many senior respondents (41 percent) felt that their children would be likely/very likely to support their decision to use a reverse mortgage to stay in their home longer. Part of the reason for the limited interest in reverse mortgages may stem from the fact that the benefits of using home equity to pay for care or modifica- tions are not obvious to consumers. When asked, over one-third of seniors (36 percent) and 28 per- cent of adult children could think of no benefit for seniors (or in the case of adult children, their par- ents) if they make use of home equity to pay for the help to stay in their own home. The most often mentioned benefits to seniors include staying in the home (19 percent) and maintaining independence
  28. 28. 25 (11 percent). Adult children (11 percent) were more likely than senior respondents (1 percent) to mention the benefit that the senior would get the money they need. Similarly, about four in ten (35 percent) of seniors and 41 percent of adult children see no benefits for children if a senior were to use their home equity to pay for in-home services and supports. The most often mentioned benefits to adult children included less responsibility (11 percent of seniors and 5 per- cent of adult children) and saving money (10 per- cent of seniors and 16 percent of adult children). The findings also revealed that consumers see few clear drawbacks for using home equity to pay for in-home services and supports. About four in ten senior respondents (39 percent) and 36 percent of adult children saw no drawbacks for seniors to use home equity to pay for the help to stay in their own homes. Drawbacks cited by both seniors and adult children included difficulty repaying the loan, out- living the money, and losing the home. None of these issues were mentioned by more than about one-tenth of those interviewed. Most seniors and adult children also see no drawbacks for the chil- dren if the seniors used home equity to pay for help to stay at home. Adult children were considerably more likely (70 percent) than seniors (54 percent) to see no drawbacks for the children of older hom- eowners. Another challenge to this financing strategy is that many people do not intend to take out a reverse mortgage because they do not think they will need it. About four in ten seniors and adult children be- lieve it would not be necessary to use home equity to pay for care at home or home modifications be- cause “it just won’t happen” or “it will not have to be done.” More than four in ten seniors (42 per- cent) and over half of adult children (52 percent) indicated that the family would take care of the senior once they need help. About one-quarter of seniors (27 percent) and 17 percent of adult chil- dren believe that the senior will be able to pay for help or home modifications so they can continue to live at home. Over half of senior respondents (59 percent) be- lieve that they are likely to extremely likely to stay in their own home once they need help with every- day activities. Despite this optimism, many senior respondents (43 percent) had not made any finan- cial plans to cover the cost of help they would need to stay at home. Responses offered as “financial planning” ranged from insurance to government assistance to help from family members. About one-quarter (27 percent) of adult children did not know if their parents had made financial plans for long-term care. Inadequate preparation for long-term care found in this survey is similar to findings from other con- sumer studies. One of the most prevalent percep- tions among Americans is that they will never need long-term care. Although a recent survey found that 61 percent of people ages 40 to 70 believe that their chances of needing long-term care are greater than being in an auto accident, most people remain unaware of the challenges of meeting this need. Attitudes toward using reverse mortgages for long-term care insurance Reverse mortgages offer another option to help elders pay for long-term care insurance. Using a portion of home equity to purchase a policy can significantly leverage housing wealth for long- term care. But this strategy can also be very costly because borrowers would be paying both insur- ance premiums and interest on the loan for many years. In addition, borrowers who use the proceeds of their loan to pay their premiums face the risk of their coverage lapsing if they run out of funds be- fore they need care. They may also have difficulty keeping their policy in force if insurance premiums increase substantially. In the telephone interviews conducted for this study, only 10 percent of seniors indicated that they would be at least moderately likely to use a
  29. 29. 26 reverse mortgage to buy a long-term care policy. Interestingly, 19 percent of adult children felt that this option would be something that their parents would be likely to consider. Limited interest in this financing option may reflect the fact that long-term care insurance is typically sold as a way to protect financial assets. As such, it may seem almost coun- terintuitive to tap home equity to pay for a long- term care policy. In a separate study conducted for CMS, researchers asked seniors age 62 and older about their attitudes toward using a HECM loan to purchase long-term care insurance. In general, the focus group par- ticipants were aware of the risks associated with long-term care but they were less familiar with re- verse mortgages. Many were reluctant to take on more debt to pay for a long-term care policy, even if the upfront HECM mortgage insurance premium were eliminated. Most respondents saw reverse mortgages as a “last resort,” to be used only for an emergency or critical need. When asked about the new HUD law, participants were uncomfortable with the requirement that they use all the proceeds of the loan for insurance if they wanted to avoid paying the upfront mortgage insurance premium. Using reverse mortgages for long-term care Reverse mortgages offer several benefits for im- paired elders. These funds are quickly available to qualifying homeowners so that they can deal with long-term care needs as they arise. Funds can be used for any purpose, such as paying for family caregivers, home modifications, or a care coordina- tor. These loans give consumers considerable flex- ibility in managing their financial assets over time. The potential need for financial assistance with in-home services and supports among older home- owners could be substantial.Among all households in 2000 where the youngest homeowner is at least age 62, 29 percent have difficulty or need help per- forming everyday activities. These include about 1.7 million homeowners (in the case of couples, at least one spouse) who require assistance with one or more ADLs, the most severe type of impairment associated with long-term care needs. (Figure 2.4). An additional 4 percent of these households only needed help with IADLs. A high proportion (46 percent) of these older ho- meowners have a functional limitation, such as difficulty with climbing stairs or carrying grocer- ies, that may make it hard for them to continue to live at home safely. While these impairments are modest, they can have serious consequences if they lead to bigger problems such as malnutrition or debilitating injuries. For example, arthritis can make it hard to cook and impossible to climb stairs. More than one-third of seniors fall each year, and of those who fall, up to 30 percent suffer serious injuries (such as hip fractures) that make it hard for them to continue to live at home. Elders over age 71 who fall are significantly more likely to need nursing home care. Encouraging greater use of reverse mortgages among elders who need long-term care will present many new challenges. A high level of impairment can make it difficult for older Americans to “age in place.” Homeowners who need help with ADLs will need considerably more financial resources to pay for in-home services and supports than elders who only have a functional limitation. In addition, the risk of ADL impairment increases with age, so severely impaired seniors who take out a reverse

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