LEGISLATIVE BACKGROUNDER:
Long-Term Care – The REAL Health Care Crisis in America

THE PRESIDENT IS BEING CRITICIZED THAT HIS CURRENT PROPOSAL CATERS TO THE WEALTHY BY ELIMINATING TAXATION OF DIVIDENDS. IF HE WANTS TO REALLY DO SOMETHING FOR THE MIDDLE CLASS, HE CAN ADVANCE TAX INCENTIVES FOR LONG-TERM CARE INSURANCE.

PROBLEM: Long-term care is the real health care crisis in America and represents an economic crisis of gargantuan proportions in the first half of this century due to lost productivity and paying for the baby boomers on Medicaid. It particularly affects the middle class, as 1/3 of the people who are purchasing long-term care insurance have income and assets less than $35,000. Over half have incomes less than $50,000.

BACKGROUND: How to handle long-term care is an unprecedented problem because families bore most of the load in the last century. Families are unable to handle the load today due to geographical dispersion and the fact that two-thirds of women work. Dual-income families are the norm, not the exception, which eliminates the primary caregiver system in the home that was prevalent in the preceding century. Added to the shortage of caregiver problem is a society that is living longer than at any other period in history. There are 76 million baby boomers born between 1946 and 1964, and the first wave will start turning 65 in this decade (2011). Never have we experienced this many older people in world, and it’s going to get much worse. A fourth of the U.S. population is over 50 years old today (70 million people).

There are only four ways to pay for long-term care:

1. Self-pay: Long-term care costs about $60,000 annually today for either a ten-hour shift of home health care or semi-private nursing home care and that number is projected to triple in 20 years. Using this projection, a 50 year old will be looking at over $300,000 a year by age 80. Using a 6% lost investment opportunity, a couple in their mid-50s who self-pay a five-year long-term care episode in the mid-70’s on only one spouse will sustain a $1.4 million impact on their estate over the 30 year period between age 55 and age 85. Needless to say, only a small percentage of Americans are able to absorb this degree of financial impact.
2. Medicaid: For 2000, the Center for Medicare and Medicaid Services reports that Medicaid spent about $187 billion for health care in the U.S. and at least $80 billion of that was for nursing home care ($48,553), home health ($8,582) and home and community-based waivers ($23,794). Medicaid is projected to grow 8.8% annually by the Congressional Budget Office for 2002 – 2012.
   
   Because Medicaid pays less than the private-pay rate, Medicaid providers struggle to provide appropriate services for an aging population. This means that Medicaid patients suffer from lack of choice. Medicaid means mostly nursing home care because dollars are scarce for care at home or in assisted living facilities. Generally, Medicaid patients are not allowed to enjoy a private room, and they go wherever there is a bed available, which could be hours away from their families. Clearly, lack of choice is the most pressing problem from the Medicaid consumer’s perspective.
3. Federally funded long-term care program: In 1945, a decade after Social Security was implemented, there were 42 workers for every retiree. That ratio now rests at 3.4 to 1 and the projection is 2 to 1 by 2030. When a strong debate exists today just about adding minimal drug coverage to Medicare, adding a national long-term care program is fiscally inconceivable, especially when compared to the financial issues related to existing entitlement programs. Today almost half of total federal revenue goes to Social Security, Medicare, Medicaid and net interest, and the U.S. Comptroller General says it will be 75% by 2030 if we make no changes.
4. Long-term care insurance: LTC insurance allows consumers to have private-pay choices for care and relieves the burden on tax-payer funded government programs, by injecting private-pay dollars for long-term care. A LifePlans survey last year said that if a 100% deduction is passed, for every dollar of federal revenue lost, $1.06 would be saved for Medicaid, a figure I believe to be dramatically understated because it doesn’t account for the number of people who would no longer try to transfer assets and get on Medicaid for LTC.
   Here is proof that long-term care insurance saves Medicaid dollars: Medicaid pays for 2/3 of nursing home patients nationally, but is substantially lower for states with higher market penetration of LTC insurance. Medicaid patients in Iowa, Kansas, Nebraska and North Dakota are 50%, 53%, 53% and 55% respectively. In all four states, over 15% of 65+ residents own LTC insurance. {Source: “2000 Nursing Home Statistical Yearbook”, c. 2001 and Health Insurance Association of America “LTC Insurance in 1998-1999”, 2/02)

As good as the solution of long-term care insurance appears to be, unfortunately numerous myths about long-term care and long-term care insurance abound and only about 5.5 million Americans own long-term care insurance today. The market penetration is well under 10% and only about 2% if you consider ages 18 and up which is the starting age for most major policies today. (Source: NAIC/HIAA)

Fact: The American Council of Life Insurance has determined that 60% of Americans age 35 and up can afford at least a three-year benefit period policy by spending 2% or less of their income, and 40% can afford a six-year benefit period.

Fact: Americans are resistant to buying LTC insurance because:

1. They think it’s nursing home insurance for old folks

Fact: Less than 20% of long-term care is in a nursing home
Fact: 40% of people who need long-term care are working-age adults 18-64
(Source: Congressional Research Service, 2001)

2. They think they are already covered either by health insurance, Medicare or Medicaid
3. They think the government will pay for their long-term care with their taxes

Long-term care is the Titanic and the iceberg is only a few miles away. To avert economic and emotional disaster, we MUST find a way for private long-term care insurance to work in a short period of time to save taxpayer dollars for the poor people who really need the Medicaid dollars. To do this, we need to:

1. Implement meaningful tax incentives to promote the purchase of individual and group long-term care insurance policies

   Current tax incentives:

   1. Benefit payments are tax-free up to $220 per day or the actual charge, whichever is greater.
   2. An age-based portion of long-term care insurance premium counts as a medical expense so nothing is deductible until medical expenses exceed 7.5% of adjusted gross income. The 2003 amounts are:
      
      40 and younger $250
      41 - 50 $470
      51 – 60 $940
      61 - 70 $2,510
      71 and older $3,130
      
   3. Employers can deduct 100% of LTCI premium for employees. C-Corps can deduct 100% of owner premium. “Self-employed” business owners cannot. They get 100% of the age-based amount in the above table as an above-the-line deduction in 2003.
   4. Premium contributions made by employers are not taxable income to employees.
   5. Benefits are tax-free for employees up to $220 per day or the actual charge, whichever is greater, whether or not employers pay any or all of the premium.
      
      What we need: An above-the-line deduction is needed for 100% of the premium AND we need long-term care insurance to be eligible for inclusion in a Section 125 (cafeteria plan) so employees can pay premiums with pre-tax dollars. (It’s the only major benefit not included in a Section 125 at this time.)

   Proposed tax incentives:

   1. Both HR831 and S627 base an above-the-line deduction on the above age-based table, not 100% of the long-term care insurance premium.
   2. The inclusion of LTC insurance in Section 125 (cafeteria plans) is limited to the age-based table above, not 100% of the premium. This provides an incentive for inadequate benefits to be sold (i.e. without inflation coverage) to keep the premium below the age-based amounts for administrative purposes, thereby hurting the consumer by providing inadequate benefits at claim time.
   3. A caregiver tax credit phased in over four years up to $3,000 per long-term care patient the caregiver is taking care of. Reductions in this amount begin after $150,000 in modified adjusted gross income on a joint return and after $75,000 for any other case.

   The budget for these proposed incentives is $44.7 billion:
   
   $18.4 – tax incentive for individuals
   $2.0 – Section 125 (cafeteria plan) inclusion
   $24.2 – caregiver tax credit

   The President’s budget proposal for 2002 proposes an above-the-line deduction equal to the above age-based table to be 25% for 2004, 35% for 2005, 65% for 2006 and 100% in 2007 and does not include the Section 125 (cafeteria plans) provision for LTC insurance at all.
   
   BOTH APPROACHES MAY BE TOO LITTLE, TOO LATE to save the huge economic crisis that we are facing if the baby boomers fall onto Medicaid or any other type of public assistance. And these numbers make the $20.4 cost for just the tax incentives (without the caregiver tax credit) seem small.

2. Use the announcement of the tax incentives to kick off a national education campaign AIMED AT ALL AGES, because this is a huge family issue and because Americans need to buy long-term care insurance at younger ages. Also, the Health Insurance of America has shown in two major surveys that the #1 thing that will make both individuals and employees buy long-term care insurance is an above-the-line tax incentive, so it would make sense to center the communications campaign around this announcement.
   
   Reasons why we need a national education campaign: The clock is ticking. The projection is that in the next five years, elder care will replace child care as the #1 dependent care need in America. We can’t write insurance on people when they already need the care. Employees can buy it on their parents now at discounted group rates so they can KEEP THEIR JOBS and productivity doesn’t grind to a halt in the next 20-30 years. A major study just showed that employees whose family members have long-term care insurance are twice as likely to keep their jobs as those without LTCI. (LifePlans, Inc. and MetLife Mature Market Institute, 3/01)
   
   Ideas for a national education campaign: If this theme is presented as a national crisis that requires our nation to pull together, the media will cooperate and consumers will respond accordingly.
   
   A well-orchestrated campaign using television and radio talk shows as well as public service announcements in these mediums in addition to print (press releases for most newspapers, small and large, can be transmitted electronically) would cost almost nothing and would result in a national “Got Milk?” campaign (“Got LTCI?”) and that is what we need.

3. Remove legislative barriers to the long-term care insurance partnership program so that more than four states (NY, CA, CT, CA) can implement a public-private partnership financing mechanism for long-term care. Legislation has been introduced to do this with HR 1041 introduced 3/15/01 by Rep. John Peterson (R-PA) and S.2199, introduced 4/18/02 by Sen. Larry Craig (R-ID).
   
   Here’s how the Partnership works: In all but NY, for every dollar the Partnership policy pays, a dollar of assets can be sheltered when the policyholder applies for Medicaid. New York allows policyholders to apply for Medicaid with unlimited asset protection after the insured has used up the benefits from a policy that will pay benefits for three years nursing home/6 years home care (or a combination). The weakness in the NY model is that the policyholder can use up all assets during the term of the insurance policy if he or she purchased an inadequate daily benefit. For example, the minimum daily benefit required for 2002 is only about $140 per day, yet care costs upward of $200-$300 per day in New York. The policyholder could exhaust assets making up the difference, thereby defeating the asset protection purpose of buying the policy. Indiana has a hybrid of the NY model and the model used by the other states that can be learned from.
   
   This was struck down by the Waxman Amendment in OBRA ’93 that killed the movement by saying that any new state could only protect assets while the policyholder is alive so estate recovery kicks in at death. Repealing this amendment would provide a quick fix and would allow additional states to implement a Partnership program, which several, especially Pennsylvania, desire to do.

4. Enforce estate recovery in that if Medicaid is awarded, that it becomes a loan, not an entitlement.
   
   Estate recovery is required per OBRA ’93, yet very few states enforce it effectively. Very few states go beyond probate in the estate recovery effort, which puts much more teeth into the effort. Also many states do not have a lien program on the primary residence, which means Medicaid gets paid back first whenever the house is sold. This certainly makes Medicaid a loan, not an entitlement. Publicized intent to do estate recovery deters asset transfers in order to qualify for Medicaid funding. Ohio, for example, pays an attorney a percentage of funds recovered from the estates of Medicaid recipients. An aggressive estate recovery policy results in an almost immediate savings to the Medicaid program, as “crisis transfers” as these are called are for people who are immediately going into the nursing home as a Medicaid patient.

CALL TO ACTION: Tax incentives are going in the wrong direction. President Bush’s current proposal calls for nothing to start until 01/01/04, then be phased in over four years for a total projected cost of $4.3 billion in lost tax revenue by 2007 and $20.3 billion by 2012. This package is still built around the age-related amounts provided by the HIPAA table, which incents long-term care insurance to be purchased at older ages, which is a reverse strategy because we need it to be purchased by younger people. And, these small amounts are almost meaningless when people really see how small they are. Again, there is nothing in his proposal to include long-term care insurance in a Section 125 plan, which is the corporate vehicle that enables employees to pay for benefits with pre-tax dollars. Every other major benefit is in a Section 125 plan (disability income, life, cancer, dental, vision, intensive care policies) but long-term care insurance is conspicuously absent.

THE BIG POINT: The lost revenue from tax incentives today is NOTHING compared to paying for the long-term care of the baby boomers on Medicaid or any other type of public assistance. Congress and the President are not connecting the dots between these two figures. If we don’t make private insurance work and do it quickly, then we are in essence as a country saying we will self-insure for long-term care by paying the total amount with taxpayer dollars. By using long-term care insurance to finance long-term care as much as possible, we can pay the nation’s long-term care bill for pennies on the dollar.

TIMING: The introduction of the long-term care insurance program for civilian and military federal employees and retirees during the open season (July – December, 2002) is the perfect vehicle to orchestrate a national campaign to educate Americans on long-term care insurance. This offering affects about 20 million people, including the First Family and Congressional representatives and their families. Private employers will feel pressure to offer LTCI as an employee benefit and most plans will be voluntary with no employer contribution, which makes it essential to have the Section 125 piece in place so employees get the best deal by paying premium with pre-tax dollars. The Federal family already has an advantage by enjoying premiums 15-20% lower due to no agent involvement and no commission payments. We should give the rest of Americans that advantage by allowing them to pay premiums with pre-tax dollars, which in effect, discounts the premiums and puts them more on the same level as federal employees/retirees. A LifePlans, Inc. study said that by allowing a 100% of premium above-the-line deduction equates to a 19% premium discount.

A PBS documentary on long-term care and caregiving entitled "And Thou Shalt Honor" aired prime-time on October 9, 2002. It had double the ratings in many markets, which just emphasizes how many people are touched by the caregiving issue.

CONGRESS IS ELIGIBLE FOR THE FEDERAL LTCI PROGRAM WHICH PROVIDES MORE LEVERAGE THAN AT ANY OTHER TIME IN HISTORY TO PASS MEANINGFUL TAX INCENTIVES FOR LONG-TERM CARE INSURANCE IN THIS CONGRESSIONAL SESSION. The key is to write a meaningful bill and then make a very simple, straightforward presentation to Congress and the President on its urgency. I am volunteering as an American to help write the bill and make the presentation to Congress. I am in an ideal position to do that as I have been selected by the Federal program to develop and conduct 2000 employee education seminars in over 200 cities in 43 states and the District of Columbia, as well as produce a companion employee education video and webinar to transmit the need to purchase long-term care insurance on the employee and the employee’s extended family members. (The video and webinar can be viewed at www.LTCFEDS.com) These programs will be delivered between July 1, 2002 and December 31, 2002. I am also the author of the book, Long-Term Care: Your Financial Planning Guide, published by Kensington Books, NYC, 2001 (update due out in April, 2003) and have trained over 37,000 insurance agents to sell long-term care insurance since founding my consulting/training company in August, 1991.

Phyllis Shelton, President
LTC Consultants
5239 Harding Place
Nashville, TN 37217
800-844-4893
615-361-1152 general office line
ltcshelton@aol.com
www.ltcconsultants.com