As we begin 2013, long-term care (LTC) continues to be an issue that estate-planning advisors must address with their clients. However, the landscape is now different. Several of the traditional methods of paying for LTC are undergoing significant changes. Also, the Affordable Care Act (ACA)1 will impact our elder clients.
Medicare, although not a significant payer of LTC, is relied on by millions of seniors and those with disabilities to help pay for rehabilitation and other types of therapies. For example, an individual who has a stroke and needs to go into a nursing home for short-term rehabilitation to regain the use of one of his limbs, might rely on Medicare to cover some of those services. Provided certain conditions are met, Medicare covers up to 100 days of skilled nursing care and rehabilitation. Although significant co-payments are required, this is still a huge help for seniors, since the average cost of a nursing home in some major metropolitan areas can exceed $400 to $500 per day.2
Until recently, however, Medicare coverage wasn’t provided if the patient didn’t show improvement. Often, the family would be told that their loved one has “plateaued” and is no longer able to improve, leading to a termination of Medicare coverage. This policy was challenged in a class action lawsuit filed by the Center for Medicare Advocacy and Vermont Legal Aid, in which the plaintiffs alleged that neither the Medicare statute nor the regulations required improvement in the patient’s condition as a precursor to coverage. According to the plaintiffs, this was an internal Medicare policy not supported by law. After the government’s motion to dismiss was denied, the Obama administration agreed to settle the case and revise the Medicare manual to no longer require improvement, but rather, to base coverage on whether the beneficiary needs skilled care. Now, Medicare coverage will be provided if the treatment is necessary to maintain one’s condition or to prevent further deterioration. This is a significant development and should help a large number of Medicare beneficiaries receive treatment. While at first blush this would appear to increase the overall cost of the Medicare program, it may, in fact, have the opposite effect, since the additional therapy may prevent further deterioration and expense.
Even with the recent class action win, Medicare coverage of LTC is extremely limited. Thus, many individuals purchase LTC insurance to provide coverage in the event of a chronic illness or other LTC need. LTC insurance, once viewed by many as the best and most cost-effective way to finance LTC, is undergoing a sea change. An extremely complex product, LTC insurance provides coverage for certain types of care delivered at home, in assisted living or in a nursing home. Although subject to strict underwriting requirements, if purchased early enough in life, it often provided individuals with a way to ensure quality care, while safeguarding their assets from the catastrophic cost of LTC. Unfortunately, due to a variety of factors, LTC insurance hasn’t been the panacea many thought it would be. Many of the big players in the industry have either stopped selling policies or have significantly reduced their offerings to potential policy holders. These insurers simply haven’t been able to make money in this marketplace. This has made LTC insurance much more difficult to obtain for many. Those fortunate enough to be offered a policy must pay much higher prices.
This change in the LTC insurance space is the result of a confluence of factors: (1) When LTC insurance first became a viable product in the late 1980s to early 1990s, long-term interest rates were near double-digit levels. Today, the 10-year Treasury note is yielding under 2 percent. Since a substantial amount of the money insurance companies use to pay claims comes from investment returns, this has had an adverse effect on their ability to pay claims, thus necessitating an increase in rates; (2) The lapse rate on LTC insurance policies has been lower than originally anticipated, resulting in more claims being filed and paid. With life insurance, may policyholders purchase term insurance, which expires, or they otherwise allow their policy to lapse, since the original need for the insurance no longer exists. A much different trend has developed with LTC insurance, as policyholders aren’t allowing their policies to lapse. Instead, they’re keeping their policies in force and, ultimately, filing claims; and (3) Due to advances in modern medicine, people are living longer, leading to an increase in chronic illness. Moreover, the cost of providing LTC has gone up way more than anticipated, leading to more people filing claims for higher amounts than originally projected. All of the foregoing factors have put stress on insurance companies, forcing many to exit this area or severely limit the products they offer.
On a positive note, the remaining players in this field are offering new and innovative products in an attempt to rekindle interest in LTC insurance. Consumers have expressed concerns that paying LTC insurance premiums is akin to renting, since there’s no cash value accumulation, and if you never need LTC, you have basically received no return on your investment. People don’t want to pay for something they may not need. In response, the insurance industry has developed hybrid products, which combine LTC insurance with annuities or life insurance. This way, your clients or their heirs get something back in the event they don’t need LTC.
Without LTC insurance, many may be forced to rely on Medicaid to cover the cost of LTC. A jointly funded federal/state program, Medicaid was intended to be the payer of last resort; however, it’s turned into a safety net for the middle class who have no other means to pay for LTC. With ever-tightening federal and state budgets, Medicaid continues to be a target of cutbacks. Under current law, certain asset transfers within five years of an application for Medicaid will delay the ability to receive benefits.
In a recent unique case from Pennsylvania, a son was held financially responsible for his mother’s nursing home expenses under a state filial responsibility law. Approximately 30 states have filial responsibility laws. In recent times, most jurisdictions have chosen not to enforce such laws, but that could change with the national conversation now focused on deficit reduction, and entitlement programs are increasingly at risk. Filial support laws typically don’t apply, unless a parent receives financial aid from the government or is in danger of defaulting on medical or nursing home bills. In such cases, interested parties are entitled to file lawsuits seeking payment. Courts have discretion to consider an adult child’s ability to pay, but in Pennsylvania, the son facing a $93,000 charge had an annual income of $85,000.
In the Pennsylvania case, a mother entered a nursing home after a car crash. When her health improved, she moved to Greece without paying the nursing home. The nursing home sued her son for the unpaid debt, and he was held responsible.3
The cutbacks to LTC are even being extended to veterans. A recent Senate Special Committee on Aging hearing concluded that we need to take steps to ensure that only qualified veterans and their survivors receive benefits. The General Accounting Office conducted a study of veterans’ benefits and recommended that, among other things, Congress establish a look-back period and penalty period, similar to other government means-tested benefit programs, for claimants who transfer assets and then try to qualify for U.S. Department of Veteran Affairs (VA) pension benefits. To be eligible for VA benefits, an applicant must meet certain income and asset requirements.
A Senate bill, S.3270, was introduced that provides for a 3-year look-back period with respect to VA benefits and asset transfers for less than fair market value. Currently, there’s no prohibition on transferring assets prior to applying for VA benefits. If enacted, this bill will make it significantly more difficult and expensive for veterans to receive much-needed LTC.
The U.S. Supreme Court confirmed that key elements of the ACA are constitutional.4 The impact on elder law and special needs practices could be enormous.
Significantly, health insurers won’t be able to rely on pre-existing conditions as a basis for rejecting applications for health insurance. The ACA also provides that there can be no discrimination—no difference—in premiums that will be charged for individuals with disabilities, as opposed to others. This means that those with special needs may be able to purchase private health insurance rather than rely on the federal Medicaid program.
Consider the countless individuals who receive Medicaid and have first-party special needs trusts (SNTs). These are funded with assets of the individual himself, rather than from a parent or other third party. All first-party SNTs must include a provision stating that the state is reimbursed the cost of Medicaid benefits, and perhaps others, on the death of the beneficiary who’s disabled. With the ACA, the need for Medicaid for non-institutionalized individuals diminishes or is, perhaps, eliminated. In turn, this means that trustees and beneficiaries of such trusts will seriously consider termination, in part to avoid the ultimate payback or reimbursement provision if Medicaid benefits continue. The ACA effectively eliminates asset eligibility issues in the context of health insurance.
Keep in mind that the ACA has no impact on LTC costs and skilled nursing care in particular. The ACA included the Community Living Assistance Services and Supports (CLASS) Act, which was designed to address the cost of LTC. These provisions are seriously flawed, and the CLASS Act has been effectively abandoned.
The re-election of President Obama assures that the federal government will proceed with full implementation of the ACA. Some states are actively cooperating and welcoming this new approach to health care in the United States. Some governors are hesitating or outright refusing to accept implementation in their states, which is largely voluntary on a state-by-state basis. This means that, inevitably, implementation will be arduous, challenging and unpredictable. The full impact on America’s elders and individuals with disabilities will remain unclear for years, if not decades.
1. Affordable Care Act, PUB. L. 111-148, 124 STAT. 119 (March 23, 2010).
2. “Market Survey of Long-Term Care Costs,” Metlife, November 2012, www.metlife.com/mmi/research/2012-market-survey-long-term-care-costs.html#keyfindings.
3. Jimmo v. Sebelius, No. 11-cv-17 (D.Vt.) (Jan. 18, 2011).
4. Nat’l Fed’n of Independent Bus. v. Sebelius, 132 S.Ct. 2566 (June 28, 2012).