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Reverse mortgage save medicare and social security 5 billion a year


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  • 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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
  • 30. 27 mortgage are likely to be older than the typical borrower today. About 18 percent of community- dwelling seniors age 85 and older need help from another person with one or more ADLs compared to only 4 percent of elders age 65 to 74 (Spillman 2003). Households where homeowners are more severe- ly impaired tend to have lower housing wealth that those with unimpaired homeowners. Among households where at least one of the homeown- ers is age 62 or older, 20 percent of non-disabled households hold home equity of $200,000 or more, compared to only 9 percent of households where a homeowner needs help with ADLs or IADLs. “Im- paired” households are more likely to have mod- est amounts of home equity. Almost two-thirds of households who need help with ADLs (63 percent) or who only need help with IADLs (65 percent) held home equity amounts less than $100,000. Having a physical or mental impairment can make it more difficult to accumulate financial assets or build up substantial home equity. Elders who had to retire early or pay significant out-of-pocket costs due to a chronic condition during their work- ing years may have difficulty paying for mortgage payments. Similarly, elders with low incomes are at increased risk for experiencing a chronic health problem. Product design barriers A considerable amount of research has been done to identify barriers in product design that could limit the use of the HECM program for seniors. These typically include: • Upfront loan costs – recently reduced by the new HECM “saver” product • Limits on the size of the loan • Misconceptions about loan features Addressing these barriers would increase the ap- peal of reverse mortgages for all seniors, including those who need long-term care. Reverse mortgages may also present unique challenges to impaired. Upfront loan costs Many seniors are deterred by the high upfront costs of reverse mortgages. These costs can represent a significant share of the total amount that can be borrowed. Today, a 75-year-old HECM borrower with a home valued at $105,000 would have to pay about $6,100 in closing costs on a loan worth $63,000. Origination fees: The origination fee covers a lender’s operating expenses. Under the HECM program, the maximum allowable origination fee is equal to the greater of $2,000 or 2 percent of the value of the home (or for more expensive homes, the FHA loan limit). The origination fee would be $2,100 for a home worth $105,000. This amount can be financed as part of the loan. Mortgage insurance: FHA charges fees for mort- gage insurance in two parts: (1) an upfront premi- um of 2 percent of the maximum claim amount, and (2) a monthly premium of 1.25% of the outstand- ing principal balance. For a home worth $105,000, the upfront mortgage insurance premium would be $2,100. In 2010 the new HECM “saver” program was introduced. It eliminated the upfront MIP in exchange for lowering the amount of money re- ceived by the borrower. The high cost of mortgage insurance is particularly unpalatable for homeowners who are very old or have a disability. Since these borrowers are un- likely to remain in their homes for a long period of time, they present less of a risk that the value of the loan will grow to exceed the value of the property. Misconceptions about loan features Seniors who are unfamiliar with reverse mort- gages often are fearful about taking out this type of loan. A common concern is that they will lose the home. Others believe that this financial option is very risky and should only be used by someone who is facing dire financial circumstances. More education will help address these concerns. Many consumers do not understand that the mortgage in-
  • 31. 28 surance offers important protections to borrowers who continue to live at home for a long time. In addition to a lack of knowledge about the way reverse mortgages work, there are also some lin- gering misconceptions about outdated product fea- tures. For instance, a small proportion of reverse mortgage loans made prior to 2000 involved equity sharing. The purpose of this feature was to provide additional upfront funds for borrowers (as much as 40-50 percent more) by using the growth in home equity to help repay the loan. Special needs of impaired borrowers Life expectancy is an important factor in evaluat- ing the cost and benefits of a reverse mortgage. One reason is that HECMs have relatively high upfront closing costs. For borrowers who opt for monthly payments and then move out, sell the home, or die within a few years of taking out the loan, a reverse mortgage can be very expensive. For example, a severely impaired borrower who receives $1,000 per month, but can only live at home for one year before needing a nursing home, could pay over $6,500 in closing costs and servicing fees for a to- tal of $12,000 in loan payments during that year. The reverse mortgage becomes due if the last re- maining borrower requires care in a nursing home or assisted living facility for more than a year. Using general life expectancy tables to determine reverse mortgage loan amounts also may be inap- propriate for severely impaired seniors whose life expectancy is shortened due to a chronic illness or impairment. Lubitz et al. estimate that the life ex- pectancy of a 70 year old with no functional limi- tations is about 14 years. Such healthy elders can expect to be active (with no limitations) for almost nine of those remaining years. In contrast, people age 70 who report that they are in poor health can expect to live another 10 years, but only 2 years will likely be without some limitation that could make it difficult to continue to live at home. Policy issues and concerns Reverse mortgages have a number of positive fea- tures for impaired elders. By using a reverse mort- gage to liquidate a portion of their housing wealth, seniors do not have to move or relinquish control over their most important asset. Since reverse mortgages only allow borrowers to tap a portion of their home equity, there may be funds left over after paying off the loan to support the spouse or cover assisted living or other facility care. Borrow- ers or their heirs can also benefit from any appre- ciation in the value of the home over time. Spouses are protected since they will never owe more than the value of their home. Upfront costs of a reverse mortgage, already per- ceived to be high, become even more critical for impaired elders. These seniors are likely to be old- er and poorer than typical reverse mortgage bor- rowers. A variety of options could be considered to lower these costs for impaired borrowers, includ- ing reducing or eliminating the upfront mortgage insurance premium. In reducing loan costs, the challenge will be to find solutions that offer a better deal to consumers without jeopardizing the viabil- ity of the HECM program and reverse mortgage marketplace, or weakening consumer protections. Innovative types of reverse mortgages may be es- pecially helpful to impaired borrowers with lower life expectancy. These products may include fea- tures such as medical underwriting or less upfront loading of expenses that could make this loan more cost effective for people who are not likely to stay at home for many years. In developing these prod- ucts, the industry will need to make sure that im- paired elders receive meaningful benefits and are not subject to excessive fees. The deeply held values that Americans have about their homes, however, suggest that this approach will not be a quick or easy solution to our nation’s long-term care financing problem. Education will be critical to raise awareness of reverse mortgag- es among seniors who want to live at home. Few
  • 32. 29 seniors are interested in using a reverse mortgage due to a reluctance to use their equity and a lack of understanding about how these loans work. Since adult children are open to the concept of us- ing a reverse mortgage to pay for long-term care or home modifications, targeting the adult children of seniors should be an important part of building awareness of reverse mortgages and how they can help older homeowners stay at home. Community- based organizations, along with local aging net- works, and Aging and Disability Resource Centers can play an important role to inform a broad audi- ence about this financing option. Borrowers who intend to take out a reverse mort- gage for long-term care need additional informa- tion to ensure that this type of loan is appropriate for their needs. There will be many challenges in educating borrowers about long-term care and long-term care insurance. Professionals who ad- vise seniors, including reverse mortgage lenders, counselors, and long-term care insurance agents, will need to be educated about the appropriate uses of home equity for long-term care financing. As more seniors are encouraged to take out a re- verse mortgage, the risk of predatory lending and fraud increases. This will be a particular concern for impaired homeowners who may be in crisis and are likely to be most vulnerable to scams. Strong protections, which could include national standards for appropriateness of loans, will be needed to help protect these vulnerable borrowers. Impaired el- ders may also need additional assistance to deal with the voluminous documents that are required for closing the loan. State departments of aging, HUD, and the mortgage industry could work to- gether to develop specialized counseling programs for reverse mortgages that include government in- centives for long-term care. 7.CurrentSizeandFuturePotential oftheReverseMortgageMarket In creating a new financing tool that is based on home equity, mortgage lenders have faced a funda- mental question: if they build it, will seniors come? Limited demand for reverse mortgages among con- sumers has made some people skeptical about the potential for significant growth in the reverse mort- gage market. A focus on poor, single homeowners as the target population for reverse mortgages may have con- tributed to this situation. This emphasis ignores several other, potentially important market niches for the product. Among them are middle-income elders with an impairment who need additional re- sources to pay for in-home services and supports. Another untapped market may be found among younger, more affluent homeowners who want to use the equity in their home to help finance long- term care insurance. How much more might the market grow if the use of reverse mortgages for long-term care became widespread? This chapter examines the current reverse mort- gage market and the factors that have contributed to its recent growth. In looking at the future market potential, the analysis estimates the total number of older households that could qualify for a reverse
  • 33. 30 mortgage and the aggregate funds that could be available to address our nation’s long-term care fi- nancing needs. Market size and loan amounts were also estimated for three key segments of the older homeowner population: current Medicaid ben- eficiaries, households at financial risk of needing Medicaid, and more affluent elder households. In addition, the analysis looked at the extent to which these loans will pay for in-home services and long- term care insurance. The final section provides an estimate of cost savings to Medicaid under differ- ent levels of reverse mortgage market penetration. Current market for reverse mortgages The reverse mortgage industry started in the early 1960s, when a small number of lenders began of- fering proprietary reverse annuity products. In the succeeding decades, reverse mortgages gradually developed. The Home Equity Conversion Mort- gage (HECM) began in 1989 as a HUD demonstra- tion program. In 2000, Congress made the HECM program a permanent program under HUD. Since 2001, lenders have seen a dramatic increase in the volume of HECMs made nationwide, reach- ing over 100,000 loans originated in total. Very low mortgage rates, combined with the fall of the stock market, have significantly increased the popularity of reverse mortgages. Several factors are likely to contribute to continued growth of the reverse mortgage market. The indus- try is maturing and these loans are becoming more widely available. Financial advisers and the media are increasing consumer awareness of this financial tool. A rapidly aging population can also increase demand for reverse mortgages in the coming years. The HECM program is the oldest and most popu- lar reverse mortgage product. In consideration of these facts, all the market analyses conducted for this Blueprint are based on the HECM product. Expanding the market through long-term care By helping seniors gradually liquidate housing wealth to augment their financial resources, re- verse mortgages have shown that they can signifi- cantly reduce the number of elders in poverty. For “cash poor” homeowners, even a small increase in monthly income can significantly improve the quality of their lives. Using reverse mortgages to pay for the long-term care need of older Americans will present different challenges. One of the biggest risks to financial security in re- tirement is unanticipated long-term care expenses. The cost of in-home services can range from an average of $200 per month in out-of-pocket ex- penses by family caregivers to $2,160 on average per month for four-hour daily home care visits. Services for elders who need round-the-clock care at home can be more expensive than nursing home care. Without adequate financial support, the needs of impaired elders can overwhelm caregivers, im- poverish older families, and lead to institutional- ization. To examine the practicability of using home equity to pay for these expenses, this study sought to an- swer four basic questions: • How many older Americans could qualify for a reverse mortgage? • Among these elders, how many are candidates for using a reverse mortgage to pay for help at home? • How much money would be available to pay for in-home services and supports? • How much long-term care will these funds buy? The role that reverse mortgages will play in financ- ing long-term care will be determined by the ex- tent to which this product helps older homeowners “age in place.” If loan amounts are small or using reverse mortgages is only an option for a narrow group of elders, this financial tool is likely to play a relatively limited role in solving the problems of long-term care financing. Alternatively, if a wide array of homeowners can benefit from tapping home equity to pay for in home services and sup-
  • 34. 31 ports, then enhancing the development of the re- verse mortgage market through policy initiatives and incentives may be warranted. Size of the potential market Based on the Health and Retirement Study, there were 27.5 million elder households with at least one resident age 62 or older. A high proportion (21.1 million) of these households (78 percent) were ho- meowners (Figure 3.2). About 74 percent owned their homes free and clear of any mortgages. In ag- gregate, elder households have accumulated over $2 trillion in home equity. Such high levels of housing wealth underscore the promise of reverse mortgages. But these numbers likely overestimate the true market potential. Of the 21 million elder homeowner households, 15 million (71 percent) would likely meet the eligibil- ity requirements for a HECM. Homeowners do not qualify for this loan for a variety of reasons. They may live in an ineligible structure such as a mobile home, or owe a sizable debt on the house (includ- ing first mortgage or home equity loans) that is too large to be paid off with the proceeds of the reverse mortgage. The requirement that both borrowers must be at least age 62 eliminates households with younger spouses. These homeowners could qualify for a reverse mortgage in the future. The cost of home and community care can be sub- stantial, so the candidate population in this analysis was further restricted to include only homeown- ers who would be able to receive a minimum of $20,000 from a reverse mortgage. Since the study’s ultimate concern is to identify ways to use reverse mortgages to promote “aging in place,” this limit reflects the relatively lower costs of in-home ser- vices and supports compared to institutional care. Seniors who need facility care could sell the house to pay for more intensive and costly services. In addition, a reverse mortgage loan becomes due when a borrower moves permanently into a nurs- ing facility. It was also important to set the finan- cial threshold low enough to include “house rich and cash poor” homeowners who are already in- clined to use a reverse mortgage but might benefit from government subsidies. Using this approach, a total of 13.2 million (48 per- cent of all elder households) are candidates for us- ing a reverse mortgage to pay for long-term care. The average home equity per candidate household is $144,000 (median is $105,000). By liquidating their housing wealth through a reverse mortgage, qualifying elder homeowners would be able to ac- cess $953 billion in total through HECM loans. The following sections examine the total candi- date population more closely to identify older ho- meowners who are likely to consider this financ- ing option, based on their financial risk of needing public assistance for long-term care, and their level of impairment. Key market segments Reverse mortgages could play an important role in reducing the likelihood that elderly house- holds will deplete their financial resources paying for long-term care. For economically vulnerable households, access to these funds also has the po- tential to lower dependence on government subsi- dized care through the Medicaid program. Among the 13.2 million candidate households, about 5.2 million (39 percent) either receive Medicaid ben- efits or are at financial risk for needing government assistance (Table 3.1). Though Medicaid beneficia-
  • 35. 32 ries may be receiving home and community ser- vices, additional cash from reverse mortgages can help cover unmet needs while providing greater choice and control over services. The potential market and size of reverse mortgage loans were estimated for three groups of older ho- meowners who face differing risks for impoverish- ment due to long-term care: 1. Current Medicaid beneficiaries. 2. Elder households at financial risk of needing Medicaid. 3. More affluent homeowners who are unlikely to qualify for government subsidized care. Each of these groups presents different challeng- es to policymakers due to their distinct socioeco- nomic characteristics. It is also likely that they will respond differently to incentives for reverse mort- gages. Medicaid beneficiaries (Group 1): This group consists of HRS 2000 respondents age 62 or older who live in the community and reported that they received full or partial Medicaid benefits. To quali- fy for home and community services through Med- icaid, these households must have very low income and assets, or spend a high proportion of their fi- nancial resources to pay for health and long-term care expenses. Based on our analysis, of the 2.54 million house- holds containing at least one Medicaid beneficiary, about 17 percent could be candidates for using a reverse mortgage to pay for longtem care (Table 3.1). Relatively few of these homeowners are mar- ried (35 percent). The average age of the youngest homeowner in this group is 75. Medicaid beneficiary households typically own $95,000 in home equity (median value is $75,000). As shown in Table 3.2, on average, these home- owners could receive a HECM loan worth $51,229. At current interest rates, these funds would enable borrowers to make monthly withdrawals of $1,465 from a HECM creditline for about three years.2 To make the funds last five years, these borrow- ers would be able to make monthly withdrawals of about $895. Households at risk for Medicaid (Group 2): These elder households are important from a policy standpoint because their limited financial resources place them at greatest risk for turning to public pro- grams should they need long-term care. Two dis- tinct groups were examined to assess the potential of reverse mortgages: 1) High Medicaid risk households (Group 2a): These homeowners have limited income and assets that likely meet the financial eligibility require- ments for receiving help at home from Medicaid. If they became severely disabled and needed to pay for long-term care, these elders would likely qualify immediately for government assistance. The average age of the youngest homeowner in this group is 74. Almost one in three (32 percent) of “high risk” households could consider using a reverse mortgage for long-tem care (Table 3.1).
  • 36. 33 These financially vulnerable elders own a substan- tial amount of home equity, on average $97,351 (median value is $75,000). By liquidating their housing wealth, they could access a lump sum or line of credit worth on average $55,085 from a HECM loan (Table 3.2). These funds could be very important to support family caregiving, since a high proportion (69 percent) of homeowners in this group is married. 2) Spend-down risk households (Group 2b): This group is primarily composed of “tweeners,” elders whose financial resources are sufficient to pay for everyday expenses but not to handle substantial out-of-pocket payments for services and supports at home. These elders may be able to qualify for Medicaid by depleting their income and assets to pay for long-term care (termed “spend-down”) in the community. In this analysis, the risk of spend-down was deter- mined based on the ability to pay for home care (about $27,000 per year in 2000). Single elders in Group 2b were included if their financial resources would pay for less than two years of daily home care. Married couples included in this group have income and assets that would cover home care ex- penses for less than four years. The average age of the youngest homeowner in this group is 74. Most of these households (66 percent) consist of unmar- ried homeowners. Close to half (45 percent) of households at finan- cial risk for “spending-down” could use a reverse mortgage to help them pay for long-term care (Ta- ble 3.1). The mean amount of home equity owned by these households is $111,466 (median value is $90,000). On average, the households could expect to get $62,800 from a reverse mortgage. At current interest rates, these borrowers could make monthly withdrawals of $1,100 from a HECM creditline for about five years (Table 3.2). Low Medicaid risk households (Group 3): This segment of the senior homeowner population con- sists of more affluent households. For this analy- sis, the group included households who can afford to pay for daily home care for at least two years (single households) or four years (married house- holds).5 About half (53 percent) of these house- holds consist of couples. This market segment is younger than the other groups, with an average age of 72 for the youngest homeowner. A high proportion of more affluent elders (61 per- cent) are candidates for using a reverse mortgage for their long-term care needs (Table 3.1). The av- erage home equity in this group is $167,792 (me- dian value is $125,000), and the average reverse mortgage loan value is $80,130 (Table 3.2). With greater access to liquid assets, more affluent elders might be reluctant to tap home equity to pay direct- ly for in-home services and supports. Demand for reverse mortgages among this group may instead emerge from a desire to protect their wealth and leverage their resources through private long-term insurance. Only a small number of Americans (8.3 million) have purchased this type of coverage. Long-term care needs among candidate house- holds Reverse mortgages can provide a substantial amount of additional funds for a broad range of old- er homeowners. However, most elders are likely to be reluctant to tap home equity until they need as- sistance. Of the 13.2 million candidate households,
  • 37. 34 about 9.8 million (74 percent) are dealing with some level of impairment that affects their ability to live at home (Table 3.3). Of these, 1.75 million (13 percent) contain one or more elders who have an immediate need for long-term care. These elders need assistance to perform one or more ADLs or IADLs. Among these households, almost one mil- lion are on Medicaid or at financial risk for needing government assistance to pay for long-term care. An additional 1.96 million households (15 percent) would likely require assistance in the near future because they only have difficulty with ADLs or IADLs. Nearly half of candidate households (6.1 million) are coping with functional limitations. These ho- meowners are an important target population for reverse mortgages because they are not well served by traditional sources of long-term care financing that target elders with a high level of impairment. Only the sickest seniors may be eligible to receive services through the Medicaid program. For ex- ample, beneficiaries receiving services under a Medicaid Home and Community Based Services Waiver (1915c) must be so severely impaired that they would otherwise require nursing home care before they can qualify for help at home. Similarly, long-term care insurance policyholders typically must need help with two or more ADLs to trigger their home care benefits. This makes it difficult for elders with limited financial resources and moder- ate levels of impairment to get timely help before they face a debilitating—and costly—crisis. By liquidating their housing wealth through a re- verse mortgage, the 9.8 million candidate house- holds dealing with some level of impairment would be able to access $695 billion in total through HECM loans. The 1.75 million candidate homeowners with an immediate need for help with ADLs or IADLs could access about $121 billion in total from these loans. These financial resources could have a significant impact on the well-being of impaired elders and their families. By having money of their own to pay for long-term care, el- ders can maintain their dignity, as well as retain some independence and control over their lives. For spouses and other family caregivers, these sup- ports can help reduce the financial, emotional, and physical strain that often comes with caring for an impaired elder. Direct payment of home and community services Impaired elder homeowners could significantly in- crease their resources to pay for in-home services and supports through a reverse mortgage. The me- dian amount of home equity is $100,000 among candidate households that include an elder who needs help with ADLs (Figure 3.3). These hom- eowners could get a reverse mortgage loan ranging
  • 38. 35 in value from about $53,000 to $72,000, depend- ing on the age of the youngest borrower. One of the benefits of these loans is that borrowers can get a substantially higher loan amount at older ages, when they are more likely to be at risk of needing assistance. A lump-sum payment can help more severely im- paired borrowers pay for immediate needs. These can include making home modifications or paying for specially modified vans that can increase their ability to live at home. For older people who find that the need for long-term care arises slowly, it may be more appropriate to receive payments from a reverse mortgage through a credit line or as fixed monthly payments (for up life in the home). Most HECM borrowers have typically elected to receive their payments through a line of credit, either alone (68 percent) or in combination with a tenure or term payment plan (20 percent, Rodda et al. 2000). Table 3.5 gives examples of the amount that the average impaired borrower could withdraw from an HECM line of credit each month. Since im- paired elders who live at home may need help for a long time, these amounts were calculated so that the credit line funds could last for about three to 10 years. The amount that would be available monthly to households that are dealing with ADLs could vary from $569 to $1,800 depending on the expected duration of the funds. Reverse mortgages can help impaired seniors pay for in-home services and supports for many years. The average home health aide charges about $72 for a four-hour visit, which adds up to $2,160 per month for daily home care (MetLife Mature Mar- ket Institute 2004c). Adult day care services cost on average about $56 per day, or $1,120 per month (NADSA 2004). At these rates, a 75-year-old bor- rower who has $100,000 in home equity would be able to use a reverse mortgage to cover the typi- cal expenses of an adult day program for almost five years, or daily home care visits for about 2.4 years (Figure 3.4). At current interest rates, these funds could also support family caregivers by pay- ing for their out-of-pocket costs ($200 per month) and respite care once per week ($300 per month) for more than 11 years. Since lenders offer higher loan amounts at older ages, an 85-year-old borrow- er would be able to pay for assistance for longer periods. Another way to evaluate the potential value of a re- verse mortgage is to compare the size of the poten- tial loan to expected lifetime home care expenses. It is difficult to determine how much in-home ser- vices and supports impaired elders may need after age 65. Elders with a strong informal support sys- tem may be able to rely exclusively on family help. In contrast, those who need substantial assistance, or who cannot depend on family for help, may re-
  • 39. 36 quire considerable paid care to stay at home. An analysis by the Lewin Group estimates that most seniors (71.8 percent) will need some paid home care services (Table 3.6). Most Americans who reached age 65 (91.2 percent) are likely to need less than 730 home care visits in their lifetime, at an av- erage cost of less than $52,560. Among these older homeowners, a reverse mortgage would typically be able to cover out-of-pocket expenses for home care, plus other costs associated with a chronic ill- ness or injury. Reverse mortgages and long-term care insur- ance Private insurance can help spread the financial risk that seniors face due to long-term care. Today’s policies offer comprehensive coverage in all care settings, including nursing homes, assisted living facilities and in the home. Long-term care insur- ance can pay for a wide range of services to help policyholders stay at home, including respite care, home health aides, home modifications, and even payments for family caregivers. Affordability is a key barrier to purchasing long- term care coverage among seniors. One study found that only 31 percent of Americans age 65 and older could afford comprehensive long-term care insurance, even if they were willing to spend up to 10 percent of their income on premiums. The cost of purchasing private insurance increases significantly with age. However, one in four (24 percent) of reverse mortgage borrowers are under age 70 (see Figure 2.2), suggesting that there may be a segment of borrowers for whom this approach might be an option. Homeowners who are in good health could elect to liquidate a portion of their home equity to help pay for the cost of this coverage. To assess the vi- ability of this option, we determined the amount of money that a 70 year-old borrower would need to pay premiums until age 85, when they are likely to need assistance with daily activities. In 2004, a three-year long-term care insurance policy with in- flation protection and a 90-day elimination period, that pays $150 per day in benefits and includes home-care coverage, could cost on average about $301 per month for a single person. The cost of this coverage for couples at age 70 would be about $482 (using a 20 percent spousal discount, which is typical in the insurance industry). Figure 3.5 shows the potential amount that borrow- ers could withdraw monthly from an HECM cred- it line, starting at age 70, to pay these long-term care insurance premiums. These estimates suggest that single elders would need homes worth at least $100,000 to be able to use the proceeds of a re- verse mortgage to pay for a three-year policy for an estimated 15 years. For couples with such mod- est amounts of housing wealth, using reverse mort- gages for long-term care insurance is not an option. They would need a home worth at least $130,000 to obtain a loan that would pay for this insurance. Using most or all of the proceeds from a reverse mortgage to pay for this coverage, however, could be risky for many households with such modest amounts of home equity. After paying for insur- ance premiums for 15 years, they would have little left in their HECM credit line to pay for expenses not covered by the $150 per day long-term care benefit. Since private insurance only pays when policyholders become severely impaired, these ho- meowners could also face a financial crunch if they needed to pay for assistance to stay at home prior
  • 40. 37 to triggering their insurance benefits. Without ad- ditional resources, any premium increases would raise the risk that these borrowers could lapse their policy. Recent studies also concluded that there is likely to be low demand to use HECMs to pay for private insurance, since they appears to be little overlap between the ages and incomes of the borrower pop- ulation and people who purchase long-term care insurance. From the industry perspective, the link between reverse mortgages and current long-term care insurance products also may not be a good fit. There are strict suitability standards for long-term care insurance that reverse mortgage borrowers, with incomes of $17,000 on average and often few assets other than the home, would be hard-pressed to meet. In addition, few insurance agents under- stand reverse mortgages, and they may be unwill- ing to deal with this product due to lack of com- missions. The three to four weeks that it takes to close the loan would be an additional deterrent to completing a long-term care insurance sale. An alternate approach would be to use the loan proceeds to increase the amount of long-term care that homeowners fund out-of-pocket. This could make private insurance more affordable because elders could buy less long-term care coverage. For example, homeowners could select a policy with a lengthy waiting period (such as one year) and use loan proceeds to cover expenses until the in- surance starts paying benefits. Alternatively, they could purchase a limited amount of long-term care coverage (such as a two-year policy) and pay for any care they needed beyond this time period. There are several benefits to this approach. When the purchase of long-term care insurance is not di- rectly linked to the use of reverse mortgages, ho- meowners may be more inclined to buy a policy before age 62, when premiums are considerably less expensive. Any future premium increases also may be more manageable for elders who opt for less costly policies. Not having to wait until the ho- meowner (and in the case of married couples, both spouses) is at least age 62 offers other benefits. As people grow older, they are at greater risk for be- ing uninsurable due to a pre-existing chronic health condition. 8. Potential savings to Medicaid Demand for long-term care is growing in our rap- idly aging society, placing an increasing burden on state Medicaid programs. As the largest item in state budgets, Medicaid is being targeted for cost control efforts. In this tight fiscal environment, home equity could play an important role in reduc- ing government expenditures for long-term care. On the basis of projections made by the Lewin Group, increased use of reverse mortgages for long-term care could result in savings to Medic- aid ranging from about $3.3 to almost $5 billion annually, depending on the future take up rate for these loans. And a big factor in determining the fu- ture take up rates for reverse mortgages is whether or not the home exemption is left in place regard- ing qualifying for Medicaid. If the rational thing is done by members of Congress-which is climinat- ing the home exemption in qualifying for Medic- aid, then more reverse mortgages will be taken out in future years. Today, with the home exemption in place there is a disincentive for people to take out a reverse mortgage and be responsible for their own
  • 41. 38 long-term care. Additionally, increasing the asset tranfer lookback rates that Medicaid has today (3-5 years) also needs to be a priority. The potential impact of using housing wealth to offset public expenditures for long-term care de- pends in large part on future growth of the reverse mortgage market. Currently, very few older home- owners have taken out a reverse mortgage. Engag- ing more seniors through education and incentives could spur the growth of the market. Based on our telephone interviews, 4 percent of respondents in- dicated that they would be very likely to consider tapping home equity to pay for in-home services and supports in the future. If reverse mortgage take-up rates reached this level, by 2012 Medicaid could save over $3.3 billion annually. One in four older homeowners (25 percent) may be at least moderately likely to tap home equity for long-term care, based on interview responses. Policy issues and concerns The analysis presented here suggests that reverse mortgages have the potential to significantly in- crease the funds available to pay for long-term care at home. Almost half of older homeowners could be candidates for using a reverse mortgage for long-term care. This number, however, represents only the broad potential of this financing option. Without strong incentives to overcome the reluc- tance of today’s seniors to tapping home equity, the actual number of older homeowners who take out a loan is likely to be much smaller. Since the analysis is based on home equity data from 2000, the finan- cial estimates presented in this section are likely to underestimate the true magnitude of the potential funds available from home equity. The three market segments examined in this study suggest that older homeowners vary significantly in terms of their age, marital status, and financial resources. Finding appropriate ways to help this diverse group of elders use home equity for long- term care at home will be challenging. It is also likely that these groups will respond differently to incentives for reverse mortgages. Alterative strate- gies to promoting this financing option will pres- ent significantly different policy implications in terms of costs, the immediacy of the results, and the scope and magnitude of the potential outcomes. One approach would be to use education and tar- geted incentives to encourage elders to tap home equity sooner to pay for assistance that can help them avoid or delay institutionalization. Finding resources to pay for help with daily chores or home modifications is difficult under the current frag- mented financing system. Reverse mortgages can offer a flexible alternative to pay for early interven- tions, including geriatric assessments and assistive devices. This approach could interest several seg- ments of the older homeowner population, includ- ing: • Moderate-income seniors who need addition- al funds to pay for long-term care. Living at home with a disability can be difficult for all but the wealthiest seniors. Reverse mortgages could make in-home services and supports more readily available to impaired elders who do not qualify for government assistance. • Elders who are facing the onset of a chronic health problem. These homeowners are likely to be interested in this type of loan because they are starting to have difficulty caring for themselves or are becoming concerned about their ability to live at home safely. • Seniors with severe functional limitations who are able to remain at home because they can rely on informal (unpaid) care. For these el- ders, a reverse mortgage can be very helpful to supplement family caregiving with small amounts of privately paid care. Our findings indicate that reverse mortgage loans can last for many years for those who only need modest sums each month to pay for help at home. Borrowers who spend their housing wealth at an early stage, however, will have fewer financial re- sources when they become more severely impaired. For many older Americans, the equity they have
  • 42. 39 built up in their house is their main financial safety net. Uncertainty about future health and long-term care expenses can therefore make getting a reverse mortgage a risky proposition. With so much as stake, these homeowners could benefit from some type of “insurance” mechanism that would protect them from impoverishment if they took out a reverse mortgage to pay for help at home. This could be achieved through innovative financial products that link to reverse mortgages or in partnership with Medicaid. One option would be to develop a program that allows borrowers less restrictive access to Medicaid should they exhaust their reverse mortgage loan paying for long-term care expenses. A similar approach has been devel- oped to promote long-term care insurance though the Long-Term Care Private/Public Partnership programs. Under the LTC Partnerships, participat- ing policyholders can protect a specified amount of assets from Medicaid estate recovery. Another possibility would be to use reverse mort- gages to fund a coordinated service delivery net- work for older residents who live in “naturally oc- curring retirement communities” (NORCs). Due to in-migration or aging in place, increasing numbers of neighborhoods now contain a high proportion of older homeowners. Such concentrated groups of seniors could offer economies of scale in the orga- nization and delivery of supportive services. Most existing NORC service programs assist elders in multi-unit dwellings, so this effort would need to concentrate on “open” NORC programs that tar- get seniors who live at home. “Open” NORCs may serve as a good test sites to develop affordable, pri- vate-pay services for “tweeners” who do not qual- ify for Medicaid until they face a crisis. This goal could be achieved by building partnerships among state and local agencies, the mortgage industry, and private nonprofit service providers. State Medicaid programs may elect to offer in- centives to homeowners who qualify for public programs or focus on those who are deemed “at risk” of needing government assistance. Assess- ing the appropriate role of reverse mortgages for financially vulnerable seniors presents many chal- lenges. With limited financial resources, these el- ders would quickly qualify for public assistance if they needed long-term care. Since the home is a protected asset under Medicaid eligibility rules, the motivation to access home equity among this group is likely to be small. At the same time, reverse mortgages can offer low- income, impaired elders greater choice and control over the services they receive. Medicaid recipients (Group 1) who get help at home might be interested in purchasing additional services and supports with the proceeds of a reverse mortgage. One policy op- tion would be to incentivize Medicaid beneficiaries to use reverse mortgages to help pay for living ex- penses, home modifications, and other types of as- sistance that the recipient’s state Medicaid program does not cover. Severely impaired elders with limited financial re- sources and social supports could be a key target for government incentives since many may find it difficult to continue to live at home. This group is likely to include elders at risk for “spend-down” in the community (Group 2b), because 66 percent of these homeowners are unmarried and may there- fore have fewer caregivers. Our findings suggest that the equity that most elders have accumulated in their home, while substantial, is not likely to be sufficient to cover the entire long-term bill for people who must rely extensively on paid services. Without additional support from family or other in- home programs, reverse mortgages would not be appropriate for these older homeowners. The best option might be to sell the house and move into a supported environment such as an assisted living facility. However, these facilities may be prohibi- tively expensive for elders of modest means, and there are long waiting lists for subsidized housing. With nowhere else to go, the only option for these seniors may be the nursing home. Providing incentives that help severely impaired
  • 43. 40 elders stretch their limited resources can offer an alternative to institutionalization. One approach would be to allow homeowners who are at finan- cial risk of needing Medicaid to take out a reverse mortgage in order to “buy into” the Medicaid sys- tem. Programs such as the Program of All Inclu- sive Care for the Elderly (PACE) or social HMOs (SHMO) offer comprehensive, high quality ben- efits (including primary, acute, and long-term care) to older Medicaid beneficiaries who live at home. Low-income seniors could use the funds from a reverse mortgage as a “bridge” between Medicaid eligibility and having to rely solely on private pay- ments. States could assist these low-income, non- Medicaid homeowners by subsidizing some or all of the closing costs of a reverse mortgage to help make their funds last longer. Incentive programs will need to take into consid- eration the marital status of the “at risk” segment of the senior homeowner population. Spousal pro- tections will be particularly important to encour- age the use of home equity in the high Medicaid risk population (Group 2a), 69 percent of whom are married. These “house rich and cash poor” el- ders are in a financially precarious position that is likely to make them very reluctant to tap their only financial asset to pay for the care needs of one spouse. Married homeowners are often moti- vated to use Medicaid estate planning in order to avoid total impoverishment due to nursing home care and to protect assets for the non-impaired spouse. Homeowners with significant financial resources (Group 3) are unlikely to tap into home equity. In addition, these elders tend to be younger than other market segments and would therefore receive lower amounts from a reverse mortgage. However, they may be interested in using a reverse mortgage to protect more liquid assets by purchasing long- term care insurance. More affluent homeowners may be encouraged to use reverse mortgages for this purpose by incentives such as lower loan costs or additional “back end” protection (through less restrictive access to Medicaid) should they face catastrophic long-term care expenses. Consumers who are thinking about using housing wealth to finance in-home services and supports need additional information to evaluate the appro- priateness of taking out a reverse mortgage. Since these loans can be used for any purpose, there are currently no formal standards used by the mortgage industry when marketing this product. To protect impaired, older homeowners, additional standards may be required for mortgage products and pro- grams that specifically target borrowers who need long-term care. Such standards for the appropriate use of these loans may be particularly important for borrowers who will receive government incen- tives to tap their home equity for in-home services and supports. 9. Consumer attitudes toward using home equity for long- term care financing Many households age 62 and older have substan- tial amounts of untapped housing wealth. With an estimated $953 billion in total that could be avail- able through reverse mortgages, this financial as- set has the potential to dramatically increase the ability of seniors to pay for longterm care at home. Older homeowners who qualify can get sizable amounts of money through a reverse mortgage— over $72,000 on average—to immediately pay for services, home modifications, and other supports. If elders could improve their ability to “age in place” by liquidating home equity over time, why hasn’t the market for reverse mortgages developed more rapidly? It has been difficult to convince con- sumers that taking out a reverse mortgage would be a good way to address their current and future long- term care needs. High transaction costs associated with reverse mortgages are often cited as a reason why elderly homeowners are unwilling to use home
  • 44. 41 equity. However, in addressing these market chal- lenges, there is an awareness that consumer atti- tudes will also play a key role in the development of this financing strategy for long-term care. The purpose of this chapter is to examine the unique ways that seniors treat home equity that may make this retirement asset both useful and challenging to fund long-term care. The discussion focuses on the attitudes olderAmericans have toward their homes, independent living, and long-term care costs that can be barriers to liquidating home equity. Includ- ed is an assessment of consumer interest in differ- ent incentives for reverse mortgages. Persistence of home ownership The success of any public initiative that incorpo- rates reverse mortgages depends largely on the willingness of older homeowners to draw down their housing wealth during retirement. To under- stand consumer attitudes toward using home eq- uity, it is therefore important to look at patterns of asset decumulation in retirement. Economic life-cycle models predict that individuals will ac- cumulate assets while young and then systemati- cally draw down these assets as they grow older. In reality, the decision to tap home equity in retire- ment is not so straightforward. Seniors take into account uncertainties regarding their income and investment returns, as well as the financial risks as- sociated with changes in health and marital status. The way in which seniors treat home equity has in- trigued economists for many years. This is because, in contrast to other retirement assets, older home- owners typically do not liquidate housing wealth in order to pay for everyday expenses. Instead, home ownership levels are high, even at advanced ages, and these rates appear to be growing. In 2003, 82 percent of seniors age 65-74 were homeowners, compared to 80 percent in 1993 (Joint Center for Housing Studies 2004). Ownership among people age 75 and older increased from 74 percent to 78 percent within the same period. These statistics reflect the desire, typical of over 92 percent of Americans age 65-74 and 95 percent of those age 75 and older, to remain in their homes as long as possible (Bayer and Harper 2000). This consumer survey also found that 73 percent of re- spondents age 55 and older believe that they will always live in their current residence. Figure 4.1 highlights the fact that a high proportion of elders have already stayed in their current home for over 30 years. This is true for all homeowners age 62 and older (44 percent) and for those who take out a reverse mortgage (41 percent). Older minority ho- meowners are most likely to stay in the first homes they buy. Among people over the age of 65, almost two-thirds of non-Hispanic black homeowners (65 percent) and 55 percent of Hispanic homeowners still live in their first homes. In contrast, only 32 percent of older, non-Hispanic whites live in the home that they originally purchased. (Joint Center for Housing Studies 2003). Homeownership is one of the most effective ways for households to accumulate wealth over time. By holding onto the home, seniors have built up significant amounts of equity in recent years. Fig- ure 4.2 shows average home equity for homeown- ers in 1985, 1993 and 2001, grouped by the age of the head of the household. All three years show that home equity is higher at older ages. In addi- tion, home equity gain over the last 15 years has been more pronounced for homeowners age 50
  • 45. 42 and older —from about $100,000 in 1993 to over $140,000 in 2003. The equity seniors have accumulated in their homes, on average, now accounts for about 50 per- cent of the total wealth of older Americans. The importance of housing assets in overall household wealth continues to grow, as the proportion of in- come from savings and other non-housing assets has steadily declined among seniors in the last 10 years. In 2001, more than one-third of olderAmeri- cans depended on Social Security for over 90 per- cent of their income. Because most older Americans are homeowners, housing wealth is widely distributed among fami- lies from different economic strata. Researchers at Cornell University found that there were 2.1 million elderly homeowners in poverty in 1991. Most of these economically vulnerable seniors (87 percent) owned their homes free and clear of any mortgage. The estimated total value of all homes owned by the elderly poor is $135 billion. Home equity is also more equitably distributed across households than other, more liquid forms of finan- cial wealth. A recent survey by the Administration on Aging (2003) found that only a small proportion of seniors own non-housing assets such as stock and mutual funds (29 percent), regular checking accounts (31 percent), and IRA and Keogh ac- counts (25 percent). Assessing the risk Awareness of long-term care as a retirement issue is growing in the United States. In 2001, 60 per- cent of Americans age 45 and older indicated that they were at least somewhat familiar with current long-term care services. Close to half (45 percent) of seniors 65 and older worry that they will use all their money to pay for long-term care. In making a decision to use home equity for long-term care, ho- meowners face a difficult choice. Should they take out a reverse mortgage early to purchase in-home services and supports that can help them “age in place,” or should they save their housing wealth to cover the high cost of nursing home care? The behavior of older homeowners reveals a great deal about the attitudinal barriers that policymakers will need to overcome in encouraging this private sec- tor approach to long-term care financing. Long-term care risks A growing number of services and supports are available to seniors who want to “age in place.” These options can enhance an elder’s capacity to live independently and enable them to cope with changes in physical and mental abilities over time. Even severely impaired elders can now continue to live at home if they receive appropriate assistance. The cost of these services and supports can vary from a few dollars for items such as levered door handles to $20,000 or more to retrofit a home or to pay the annual cost of help from a home care professional. In general, it appears that families do not regard the cost of in-home services and supports as a sub- stantial financial risk. Among family caregivers who assist severely impaired (Level 5) relatives and friends, two-thirds (66 percent) indicate that they do not feel any financial hardship as a result of providing care. Using several different mea- sures, researchers found that less than 11 percent of home care users had burdensome expenses for these services. Many family caregivers provide a substantial amount of unpaid assistance, and may be unaware of the substantial “hidden” costs of
  • 46. 43 providing this help. For example, employees who limit their work activities in order to provide care may face a total lifetime loss of over $659,000 due to reduced wages, pensions, and Social Secu- rity payments. In contrast to home care, the greatest fear of many seniors is that they will end their days impover- ished and in an institution. The complex medical care provided in nursing homes is expensive, cost- ing $70,080 per year on average in 2004. Among today’s seniors, 43 percent will likely enter a nurs- ing home at some time before they die. Rising lon- gevity is expected to increase this risk to 46 percent in the next 20 years. It can be difficult for older homeowners to gauge the magnitude of the financial risks they may face due to institutional care. Of those who enter a nurs- ing home, about half (51 percent) can expect to stay less than three months. One in five seniors (21 per- cent), however, will likely need five or more years of care in a facility. The probability of nursing home use also varies considerably by age. About 17 percent of 65 to 74 year olds will need facility care compared to 60 percent of people age 85 to 94. Total expected acute and longterm expenditures for older households (from age 65 until death) there- fore differs significantly by longevity. Potential out-of-pocket costs can range from $31,181 on av- erage for someone who dies age 65 to more than $200,000 for elders who die at age 90. Demographic shifts in the older population will present additional challenges to seniors who are trying to predict their household expenditures for long-term care. Rising longevity, particularly among men, may to be reducing demand for nurs- ing home care as more surviving spouses are able to provide help at home. The growing ability for married seniors to continue to live independently may help households save on some long-term care expenses. However, elderly couples who live at home face additional financial strains. Many older families may find it difficult to further stretch their already limited retirement assets when both spous- es need assistance due to chronic conditions. Liquidating home equity for long-term care Uncertainty about future health and long-term care expenses can make getting a reverse mort- gage seem like a risky proposition. Borrowers who spend their equity at an earlier stage will have fewer financial resources when they become more severely impaired. If their housing equity has been depleted, impaired elders many not be able to raise enough funds from selling the home to move into an assisted living facility or other supported hous- ing environment. There are many complex factors that influence a desire to tap home equity among older Americans. Of these, changes in marital and health status ap- pear to have the greatest impact on moving out of the home. Researchers have found that most older households are likely to wait until a “trigger event,” such as a long-term care shock or widowhood, before they make a decision to liquidate housing wealth. The proportion of older Americans who are homeowners generally begins to decline after age 70, at a rate of about 2 percent per year between age 70 and 85. For many seniors, deteriorating health precipitates a move. At that point, home equity is usually re- leased by selling the home. A recent study found that, in the period from 1995 to 2000, a long nurs- ing home stay (over 100 days) increased the prob- ability that an older person would sell the home. The impact of nursing home expenditures on hom- eownership appears to vary by gender and family composition: • At least one long stay in a nursing home re- sulted in about an 18 percent reduction in homeownership. This effect was found both among single and married homeowners.About 6 percent of single households with no lengthy nursing home stays sold their home during this period compared to 23 percent of long stayers.
  • 47. 44 Among married households, homeownership declined by 3 percent where there was no long nursing home stay and 21 percent when this care was needed. • Among married households, when a husband had a long nursing home stay, the probability of selling the home increased by 11 percent. When the wife needed extended facility care, the likelihood of a home sale increased by 20 percent. During this period, the likelihood of selling the house was 5 percent lower among homeowners who were eligible for Medicaid and had substan- tial medical expenses. This lower probability likely reflects the fact that Medicaid excludes the value of the house when counting assets for eligibility. Attitudinal barriers to using home equity There are other factors that can deter seniors from deciding to take out a reverse mortgage for long- term care. The most common consumer attitudes that could limit the use of the HECM program typi- cally include: • Housing wealth is not regarded as a financial resource (fungible asset). • Desire to leave a bequest. • Saving home equity as “insurance” for emer- gencies. Addressing these barriers would increase the likeli- hood that older homeowners would tap home eq- uity to pay for long-term care. House as a non-fungible asset One of the biggest challenges to increasing the use of reverse mortgages is that many older homeown- ers do not regard housing wealth as a financial re- source (“fungible asset”). In our telephone inter- views, seniors and adult children were asked about their attitudes toward the role the home can play in their lives (or the lives of their parents) as they age. Among the senior respondents, 77 percent simply think of their house as a place to live, and not as an investment. Without additional education and incentives, these elders are not likely to make con- sumption decisions based on home equity. An intriguing finding of the telephone interviews is a significant generational difference in attitudes toward the home. Adult children were far more likely than senior respondents to regard the home as a source of immediate funds (Figure 4.3). Al- most two-thirds of adult children respondents (62 percent) believe in using home equity versus less than half of seniors (46 percent). Younger respon- dents (63 percent) are also significantly more likely than seniors (43 percent) to believe that a reverse mortgage can help seniors continue to live in at home. These results suggest that families can play an important role in promoting the use of reverse mortgages for in-home services and supports. Most seniors respondents (79 percent) feel a strong connection to their home and have strong memo-
  • 48. 45 ries associated with it (72 percent). Older home- owners may be unwilling to spend their housing wealth since the home provides comfort, security, and a network of supportive family and friends. Bequest motive Nearly 80 percent of senior respondents to the tele- phone interviews conducted for this study reported a desire to leave a bequest to their children. Seniors are more likely than adult children to see the home as an inheritance. Only about half (54 percent) of adult children respondents expected an inheritance. Other studies have shown that most (67-78 percent) families think leaving an inheritance is somewhat to very important. Differences in attitudes toward bequests between households with and without children are typically very small. The role of bequest motives among impaired elders is not well understood. Most studies have found that parents overwhelmingly choose to divide their estate equally among their children. McGarry and Schoeni found that parents typically do not give fi- nancial assistance to children in exchange for care- giving. Other research, however, suggests that unequal es- tate division is more common among parents who need long-term care. Among unmarried parents who need help with ADLs or IADLs, 28 percent intend to disinherit a child or divide their bequests unequally among their children. In addition, 63 percent of these elders plan to exclude at least one child from the set of beneficiaries for life insurance. These parents bequeath an average of $12,000 more to children who currently provide care than to their non-caregiving siblings. Those without current care needs bequeath an average of $21,000 more to the children they identify as likely future helpers. Similarly, Light and McGarry found that about 8 percent of women (average age 62) with at least two children intend to divide their estates unequally among their children. Among these mothers, one in four (25 percent) in- dicate that such unequal bequests will favor chil- dren who provide support. It appears that poor health increases the likelihood that women intend to give unequal bequests in response to caregiving and other assistance from specific children. Children are the primary source of help at home for impaired older Americans. Only 6 percent of children who provide ongoing care to their par- ents receive direct payments for their time. With a substantial amount of bequeathable wealth tied up in home equity, taking out a reverse mortgage could have an impact on parents’ ability to encour- age family caregiving and defray children’s costs of informal care. Knapp examined the influence of a variety of socioeconomic factors on demand for reverse mortgages. He found that when family ties are weak, as measured by rate of out-migration of people age 25-39, demand for reverse mortgages among older homeowners in these regions increas- es. Megbolugbe et al. found that the economic well-being of children of the elderly also influenc- es the decisions older homeowners make regarding the accumulation or liquidation of housing wealth. Senior households whose adult children are not do- ing well financially tend to increase home equity (“trade up”) when they sell and move to another home. In contrast, households with children who are economically well-off tend to trade down. House as “insurance” Most respondents to the telephone interviews were interested in holding on to home equity as a way to manage risk. Almost three-quarters (72 percent) of seniors believe that owning a home is the best way to feel financially secure. Half (50 percent) agreed with the statement that the equity in the home serves as “insurance” against unforeseen financial needs. Fifty-nine percent feel that it is risky to bor- row against the equity in their homes. Lenders sug- gest that a “depression-era mentality” encourages some older Americans to view debt of any kind as risky and unwise.
  • 49. 46 Consequences of preserving home equity Researchers have found that the ability to live at home supports the independence and choice that is important for positive self-image among older people. For many older households, home equity is their main financial buffer against substantial medical and long-term care expenses. If homeown- ers are saving the house for precautionary reasons, then uncertainty about future longterm care needs will discourage them from liquidating housing wealth through a reverse mortgage. Encouraging older Americans to retain their home equity, either through public policy or social norms, however, may be placing seniors at greater risk of ending up in a nursing home. Without adequate support, it can be difficult for impaired elders to continue to live at home. For example, elders age 75 and older who fall are significantly more likely to need institutional care in the next year. With lim- ited incomes and non-housing assets, older hom- eowners who want to preserve housing wealth face stark choices when confronted with the need to pay for long-term care: they either sell the house, struggle to stay at home, or turn to government help through Medicaid. Elders who sell their home can face serious prob- lems. Relocating often entails the loss of famil- iar activities along with support from family and friends. This can reduce quality of life and may ac- celerate cognitive decline. The limited number of affordable and appropriate senior housing options also makes it difficult for frail elders to continue to live in the community. Older persons may struggle to find affordable and suitable housing near family caregivers, health and other services, and transpor- tation. There is often a long waiting list for govern- ment subsidized housing, and seniors may have to wait many years for these units. Impaired homeowners who want to continue liv- ing independently also may be exposed to financial risks including deteriorating homes and mounting debt. Sixty-two percent of all older homeowners live in houses that were built before 1970 and are at least 35 years old. A high proportion of reverse mortgage borrowers (65 percent) also live in such older homes (Figure 4.4). Older homes often need repairs that may be difficult or costly for impaired elders on a budget. Homes that are deteriorating lose equity and may also pull down property values throughout the neighborhood. In addition, these homes can become an increased risk to lenders. Another challenge for most older homeowners is that their homes were not designed to meet their changing needs as they age. Home modifications can increase the safety and comfort of the home en- vironment. However, 36 percent of Americans age 45 and older have not made home modifications because they cannot afford to do so. The financial challenges of “aging in place” may also be reflected in the growing number of Amer- icans age 65 and older who are going into debt. More than 50 percent of older Americans who end up in bankruptcy say that they filed because of unpaid medical expenses (Warren 2004). Aver- age self-reported credit card debt among indebted seniors increased by 89 percent between 1992 and 2001 to $4,041. Among seniors with incomes un- der $50,000, about one in five families with credit card debt spends over 40 percent of their income on debt payments, including mortgage payments. Seniors are the fastest-growing group in bankrupt-
  • 50. 47 cy. In 2003, about 96,000 older Americans filed for bankruptcy. Over the past decade, the number of seniors who filed for bankruptcy tripled. Consumer attitudes toward incentives for re- verse mortgages Reverse mortgages can offer older, impaired hom- eowners additional options for continuing to live at home. However, financial and other incentives may be needed to overcome deeply held beliefs regarding the use of home equity among today’s older homeowners.As part of the telephone survey, respondents were asked about different incentives that could address their concerns and encourage greater use of reverse mortgages. Incentive #1: Guidance from a trusted financial advisor would help reduce any fears I may have about taking out (my parents taking out) a reverse mortgage. About half (46 percent) of senior respondents are concerned about making wise decisions regarding the use of their home equity. Ensuring that con- sumers can obtain guidance from a trusted advisor could increase interest in reverse mortgages among consumers. About one in five respondents (22 per- cent of seniors and 19 percent of adult children) strongly agree with the need for professional ad- vice before taking out the loan (Figure 4.5). Adult children are significantly more likely than seniors to agree that their fears about their parents/their own use of a reverse mortgage would be allayed by receiving trusted financial guidance. * Incentive #2: It would help to have advice from a professional on how to use the funds to get the best long-term care services once the loan is complete. Navigating the complex and fragmented long-term care system in the United States can be difficult for most families. Getting advice from a professional on how to use the funds from a reverse mortgage for the best long-term care services shows more prom- ise than the other potential incentives for increasing interest in reverse mortgages among both seniors and adult children. About four in ten (40 percent seniors, 46 percent adult children) agree (7 to 10 on a 0- 10 scale) that it would help to get this profes- sional advice once the loan is complete (Figure 4.6).
  • 51. 48 Incentive #3: Lowering upfront loan costs would increase the likelihood that I would use (or support the use of) a reverse mortgage for long-term care. Of the potential motivations tested, reducing up- front loan costs appears to have the least influence on interest in reverse mortgages among seniors. Over two-thirds (67 percent) strongly disagree that lowing costs would encourage them to tap home equity for long-term care (Figure 4.7). Adult chil- dren are significantly more likely to be persuaded to support their parents’ use of a reverse mortgage than seniors are to actually make use of a reverse mortgage themselves by the mortgage provider lowering the upfront costs of the loan. This unexpected finding may reflect the fact that most survey respondents may not be aware of the upfront expenses associated with this product. These results also reaffirm the observation that the cost of the loan, while important, many not be the most critical issue that consumers consider when initially considering a reverse mortgage. As they decide to take out a loan, however, it is likely that these costs become a greater concern for potential borrowers. Incentive #4: If I (my parents) could get help with property taxes, home repairs, or homeowners in- surance, I would be more likely to use (support the use of) a reverse mortgage for long-term care. House-rich-and-cash-poor elders may have dif- ficulty keeping up with the expenses of maintain- ing a home as well as paying for long-term care. Reverse mortgage borrowers who do not fulfill these obligations risk foreclosure of their loan. States may be able to encourage the use of reverse mortgages for long-term care by helping borrowers with property taxes, home repairs, or homeowners insurance. Almost one in four seniors (23 percent) agrees that this type of assistance could increase support for using reverse mortgages for long-term care (Figure 4.8). Adult children (38 percent) are more likely than seniors to be influenced by aid with taxes, home repairs, and insurance. The Administration on Aging supports borrowers who need help to live at home through Area Agen- cies on Aging (AAAs) that are part of its Aging Network. Local AAAs help older citizens remain active in their communities. These agencies may offer minor home repairs or modifications to the home to maintain a safe home environment. These services would be especially important for reverse mortgage borrowers who lack the expertise and fi- nancing for basic repairs. Incentive #5: If the government had a program to help the senior stay at home if they spent all the re- verse mortgage money paying for long-term care, I would be more likely to use (support the use of) a reverse mortgage.
  • 52. 49 The risk of impoverishment due to long-term care costs is a concern among many older Americans. When compared to other incentives, a significant proportion of senior respondents (51 percent) were interested in the possibility that the government might offer a program that would protect borrow- ers who exhausted their loan paying for long-term care. Government assistance to help the older homeown- ers stay at home, even if their reverse mortgage proceeds run out, is a strong potential motivator for about one in five seniors (22 percent) and adult children (20 percent). Adult children are signifi- cantly more likely than seniors to agree that this type of government program would increase sup- port for use of reverse mortgages. Policy issues and concerns High levels of homeownership and home equity present an important opportunity to enhance the lives of older Americans who live in the commu- nity. The findings in this chapter indicate that the long-term care already plays an important role in the decisions older homeowners make about liqui- dating their housing wealth. However, the options that they consider are often very limited because of strong feelings about the family home. The current limited demand for reverse mortgages suggests that, in order to preserve home equity for emergen- cies, many impaired elders cope as best they can until family caregivers and non-housing resources are exhausted. At that point, they are likely to liqui- date home equity by selling the house and moving to a nursing or assisted living facility or living with children. Through education and targeted incen- tives, elders may be encouraged to tap home equity sooner to pay for in-home services and supports that can help them avoid or delay institutionaliza- tion. One of the biggest challenges will continue to be elderly homeowners’desire to preserve their equity against unanticipated expenses. Reverse mortgag- es should have greater success if policymakers can develop incentives and programs that allay hom- eowners’fears of impoverishment if they use hous- ing wealth to pay for long-term care. The interview results suggest that offering incen- tives without also providing substantial education about the value of “using the home to stay at home” will not likely result in great success. An important finding of the telephone interviews was that adult children respond far more favorably to proposed incentives for using reverse mortgages to pay for in-home services and supports. Half or more of senior homeowners strongly disagreed with most incentives presented to them during the interview. These findings suggest that educating adult chil- dren about reverse mortgages will be critical to promoting this financing option for long-term care. To increase interest in the use of reverse mort- gages, educational campaigns could target profes- sionals who advise seniors who are dealing with long-term care issues. Elders who have recently returned home from an accident or illness, or those recognizing the onset of limitations, are most like- ly to be interested in products and services that can help them “age in place”. It will be important to incorporate the attitudinal factors affecting elderly homeowners’ decisions into educational programs on reverse mortgages for long-term care. Consumers need to become
  • 53. 50 aware that these loans offer impaired homeowners additional funds to maintain their independence and enhance their choices. As part of this effort, the potential of using home equity to finance in- home services and supports should be emphasized. Aging and Disability Resource Centers, along with other state and local agencies, could play an im- portant role. This will also require that the staff at these agencies receive additional training on reverse mortgages and the appropriate use of this financial tool among impaired, older homeowners. 10. Role of Government Today, few older Americans are tapping home eq- uity through reverse mortgages, regardless of the consequences for aging in place. Many older ho- meowners are concerned about preserving these funds to meet a variety of needs, including mak- ing a bequest, ensuring a comfortable place to live, and protecting themselves against potential nurs- ing home expenses. To the extent that seniors view housing wealth as a form of “insurance,” demand for reverse mortgages will be strongly influenced by the availability of alternatives to deal with this risk. In the United States, long-term care is often re- garded as a public responsibility. Government does play an important role in providing a safety net to poor elders. However, public assistance through Medicaid is restricted and mainly pays for services only after catastrophe strikes. Under this system, the desire of seniors to protect housing wealth is often at odds with the objectives of government programs to be a payer of last resort and to serve as a safety net for the truly needy. Efforts to create a substantial “win-win” for gov- ernment and consumers by promoting greater use of reverse mortgages could therefore be enhanced though initiatives that encourage impaired elders to tap their home equity rather than shelter this as- set. With appropriate incentives and careful protec- tions, government policy may be able to signifi- cantly alter the dynamics and momentum of this private sector financing option. This chapter ex- amines how current government policies can pro- mote as well as discourage older Americans from using reverse mortgages to pay for long-term care at home. This evaluation takes a close look at Med- icaid policies regarding home equity for financial eligibility criteria, asset transfers, and estate recov- ery programs. Home equity plays an important but not always straightforward role in the means-tested Medicaid program. Federal incentives for reverse mortgages for long-term care In 2000, Congress passed a provision within the American Homeownership and Economic Op- portunity Act that authorizes HUD to waive the upfront mortgage insurance premium for Home Equity Conversion Mortgage (HECM) borrowers who use all the proceeds of their reverse mortgage to purchase a tax-qualified long-term care insur- ance policy. This option would enable the typical older homeowner with a house worth $100,000 to save $2,000 in upfront costs. HUD has not yet pub- lished regulations to implement this provision of the HECM program. This new law represents an important first step to encourage homeowners to use reverse mortgages for long-term care. However, many senior advo- cates are concerned that HECM borrowers who opt for this provision lose a great deal of flexibility in how they can use their reverse mortgage funds. By requiring that seniors use the entire proceeds of the loan to pay insurance premiums, this new op- tion places borrowers at risk of impoverishment if they cannot afford to pay for services that are not covered by their insurance policy. The risk of laps- ing coverage also increases when borrowers who would otherwise not be able to afford a policy run out of funds or are unable to pay increases in pre- miums. Requiring older homeowners to use all the funds for insurance may make it difficult for them to pay for daily and other expenses, such as repairs or taxes, that enable them to continue to live at
  • 54. 51 home and receive loan payments. In addition, this incentive will not help borrowers who pay directly for in-home services and supports. State loan programs to help homeowners Seniors often find it difficult to live at home be- cause they cannot afford home repairs or rising property taxes. Most state or local governments have made efforts to support “aging in place” by addressing these financial concerns through a va- riety of low-cost home loans. Some of these loans can only be used for only a specific purpose, like home repairs. Others are similar to conventional re- verse mortgages and can be used for any purpose. There are usually restrictions on who can apply for these loans and the amount of funds that are avail- able to borrowers. Single purpose loans 24 states and the District of Columbia provide prop- erty tax deferral programs. These programs allow older and disabled homeowners to defer payment of some or all of their property taxes until they die or sell the house. Property tax deferral loans func- tion as a special type of reverse mortgage, in that they generally provide annual loan advances that can be used only to pay property taxes. Borrow- ers are not required to make payments on this loan for as long as they continue to live in the home. Deferred taxes become a lien against the value of the home. The availability of property tax deferral and eligi- bility rules for these programs vary considerably by state. Most programs require borrowers to be at least 65, and eligibility is often limited to home- owners with low or moderate incomes. The amount of the loan varies in different programs. Borrowers may defer some part of the property tax bill for that year or a specific amount. In the most restrictive programs, the loan can only be used to pay for spe- cial assessments. Many local and some state government agencies also offer deferred payment loans to help seniors repair or improve their homes. This type of reverse mortgage gives borrowers a one-time, lump-sum payment that they will not need to repay for as long as they live in the home. These loans may be used only for the specific types of repairs or improve- ments that each program allows. These can include the installation of ramps, rails, and grab bars to enhance accessibility to the home, or storm win- dows, insulation, or weather-stripping to improve a home’s energy efficiency. Some deferred payment loan programs forgive part or all of the loan if the borrower lives in the home for a certain period of time. These programs may charge fixed interest, usually at simple rather than compound rates. Borrowers may be able to com- bine this type of loan with a reverse mortgage if the program agrees to be repaid after the HECM loan is paid. 11. Conclusions and actions step to take In 2011 United States clearly is at a tipping point financially and needs to get back on a path of fiscal responsibility. The first place to start is the govern- ment’s 3 entitlement programs, which account for 58% of the overall budget. One of those entitlement programs is Medicaid. And the action that needs to be taken with regards to Medicaid is to create the incentive for people to take care of their own future medical needs rather than rely on the government’s Medicaid program to do so. This is done by Congress eliminating the home exemption for Medicaid eligibility - a simple and needed fixed to the Medicaid program. And in con- junction with that, Congress needs to appreciate the tremendous cost savings that HUD’s reverse mort- gage program provides in saving Medicaid dollars. Those savings skyrocket once Congress eliminates the home exemption people have today in qualify- ing for Medicaid.
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