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Jun 18, 2024 • Tom Riekse Jr

Don't try and design private LTC plans around public LTC plans - it's a risk for clients


We've all seen the news - the global population is aging fast, and birthrates have plummeted. For Americans, there is also the possibility of mass deportations of undocumented/illegal immigrants in the future depending on election results. This means that there will be a shortage of caregivers in the future, driving up the cost of paying for care. The problem is not going away, and potential retirees are very concerned.
For the clients of financial advisors, it means they will have to plan for higher care costs than expected. We know there are 4 ways to pay for care - self-fund, rely on family caregiving (time is money), private Long-Term Care Insurance, and government resources.
4 ways to pay
What's the best way to plan for care? Ask someone who has gone through a family care experience.  They will tell you with hindsight the combination of family support and Long-Term Care Insurance is the most effective method to prepare for care. LTC Insurance relieves the financial pressure or concerns from families, allowing them spend quality time with those needing care, supported by paid professional caregivers.
Self-funding is the default method of paying for care but could lead to anxiety about costs among family members and the possibility of running out of money. Self-funding also means that a significant amount of assets needs to be held in conservative investments, while those with LTC Insurance can afford to take more risks and benefit from higher potential investment returns (plus tax free money for care).
Finally, there is relying on government programs.  Unfortunately, unless Americans have had personal experience with someone needing care, they may assume that government programs will pay for the costs. Let's examine what government programs currently pay for Long-Term Care and what the future is for those programs. We will consider Medicare, Medicaid, and State Insurance Initiatives.
Advisors are used to design retirement income around Social Security programs - but can they design Long-Term Care plans around government programs? Let's investigate.
If you ask the average person on the street, they may assume that Medicare pays for Long-Term Care. However, a quick glimpse at the Medicare website shows that Medicare only pays for skilled care - care in which people are getting better. It doesn't pay for custodial care, such as keeping an eye on someone with Alzheimer's. After a hospitalization, Medicare will pay for Long-Term Care up to 100 days in a nursing home or recovery care at home.
Most people on traditional Medicare also purchase a Medicare Supplement plan. Buying a Medicare supplement plan is a fairly straightforward process as there are about 8 approved plan designs that work well with Medicare.  Many plans will cover the co-insurance of the 100 days of nursing home skilled (not custodial) care.
Over the last few years, however, more and more people are choosing Medicare Advantage plans that offer lower premiums and out-of-pocket expenses than traditional Medicare. Is there a downside to these plans?
Indeed, everything does have a cost. In the case of Medicare Advantage plans, they reimburse nursing homes at a much lower level than traditional Medicare. This impacts nursing home bottom lines, leading to large numbers of facilities closing and increasing costs for other patients.
What about Medicare and home care? Well, it ends up that people with Medicare Advantage plans get less home care than people with traditional Medicare.
Medicare doesn't pay for much Long-Term Care now and, as we will learn, there isn't much funding available to pay for more in the future.
Medicaid, a joint federal/state program that was designed in the 1960s to help the poor, is the largest payor of Long-Term Care expenses.
Let's say you are living in 1976 and you had a parent that had to go to a nursing home. Concerned about the cost?  Not necessarily.  In fact, prior to 1980 you could arrange an unlimited transfer of assets and still qualify for Medicaid nursing home care. Your parent could also deduct private medical and LTC expenses to become "low income".
Over the years, several changes to the law have made it more difficult to qualify for Medicaid as asset transfers need to take place five years before care takes place. Despite efforts to make it harder to qualify for benefits there is still an active market around what is called Medicaid Planning. Elder Law attorneys can use strategies to help people qualify for Medicaid LTC benefits and allow a spouse to stay at home. After a Medicaid recipient passes, states can still engage in estate recovery to get reimbursed for benefits.
Medicaid benefits vary by state. In some states the benefits are generous and include coverage for home care as well as nursing care. In other states coverage is leaner. In many states the Medicaid reimbursement rates are not keeping up with the cost of care, leading to inadequate reimbursements. A shift in the political or fiscal situation in a particular state could lead to changes in the future. It's hard to "plan" for Medicaid because it is not a contract - it's a public assistance benefit that is rapidly going broke.
One more thing.  If you own private Long-Term Care Insurance, it could be something called "Partnership eligible" - meaning that if the contract meets certain requirements the amount of Long-Term Care benefit paid by the carrier is disregarded in order to qualify for Medicaid and the state can't engage in estate recovery. Although these programs have been around for a long time rarely does someone exhaust their LTC Insurance benefits and end up on Medicaid.  But if they do it's a nice feature of the product.
State Based LTC Insurance Programs
With all the problems of Long-Term Care funding at the federal level, some states have looked at creating their own Long-Term Care programs. The first, and only one state so far to do so, is Washington State through their Cares Fund.
The plan is financed through a 0.58% payroll tax and provides a modest benefit of $36,500 increasing with inflation. The benefit is small from the perspective of many affluent people, but that benefit could provide very helpful home care for a family without much savings. 
Prior to the plan becoming a law, people with private Long-Term Care Insurance were able to opt-out of coverage. Over half a million Washingtonians took advantage of the opt out, many with high incomes.
Unfortunately for the plan architects, the program is politically unpopular with both sides of the political aisle. Many of those who lean left think the benefits are inadequate. Those on the right don't want a payroll tax or new government program.
Now, there is a ballot initiative to repeal the entire program. (Technically the initiative is to make the plan voluntary which would in effect lead to a quick death spiral of the program.)  The voters will make a decision on the plan in the fall. 
If the Washington Cares Fund does die it sends a message to other states - if a progressive state with no income tax can't create a Long-Term Care plan, what is the incentive for their state to try?
The Frightening Fiscal Future
Financial advisors have the challenge of designing retirement and health care plans around two of the largest federal government budget items - Social Security and Medicare.  However, the US Fiscal situation says many advisors may need to update their assumptions. Medicare is projected to become insolvent in 2028, and Social Security will follow in 2033. After that, benefits will be forcibly cut unless more revenues are added.
economist chart
That's a lose-lose scenario.  Either benefits will remain the same and taxes will be raised or benefits will be cut and out-of-pocket expenses will be higher.
Combined with the demographic realities and immigration restrictions, it means advisors should adjust their expectations for what care will cost. And, as we've seen during Covid, a squeeze in the availability of labor means a rapid increase in costs. It will take A LOT of money to get access to care - and a substantial LTC policy can help.
Let's say you own private LTC Insurance, and unexpectedly the federal government creates a substantial Long-Term Care program. At that point you can adjust benefits or drop coverage, but you would have been protected in the meantime. You can't add benefits without the health and financial means in the future.
Should you take your chances with a legal contract with an insurance carrier or hope for promised government benefits? We know that providing long-term care is an important societal need and funding needs to come from both private and public sources.  Each individual needs to decide what their plan is.
Tom Riekse Jr

Written by Tom Riekse Jr

Tom Riekse, ChFC, CLU, CEBS is the Managing Director of LTCI Partners, one of the largest national distributors focused on long term-care planning. LTCI Partners works with financial advisors, benefit brokers, associations and anyone else interested in helping protect people against the devastating financial impact of a long-term care event.
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