You can't pick up the paper without seeing an article on one of the single biggest problems facing our country in this decade, the financial aspects of an aging population.

Yesterday, I attended an estate planning council meeting presented by Professor Lawrence A. Frolick of the University of Pittsburgh School of Law and he started by telling the audience that there are over 4,000,000 people in the U.S. age 85 and older!

My mother is one of them! And she's in a nursing home - and has been - and will continue to be there - possibly for many years.

So the subject of long-term care is more than academic to me.

Carol G. Einhorn is a long term care specialist with Arbor Associates , an insurance, employee benefit, and estate planning firm in Langhorne, PA.  She works with many attorneys, accountants, insurance agents and financial planners as their long term care consultant. Carol lectures frequently to lay and professional groups, is the author of numerous articles about long term care insurance, and sells long term care products for a variety of top rated companies.

Carol joins me in this commentary:

Here are some facts and figures on long-term care which you may want to share with your clients.  In fact, a client-presentable version of this is available by calling 610 924 0515 or at LONG TERM CARE: THE 10 MOST COMMONLY ASKED QUESTIONS . There's also a just updated client-oriented PowerPoint presentation on the topic you may want to use called LONG TERM CARE .

EXECUTIVE SUMMARY:

This commentary will focus on long term care. A follow-up will cover long term care insurance - as a financial solution to some of the inevitable financial perils of aging. The topic of long term care is of extreme importance - since all America will be affected in one way or another by the issues involved.

WHY LONG TERM CARE IS MAKING NEWS:

Long Term Care Insurance is suddenly on a lot of people's minds for three major reasons:

(1)  News media has made the public painfully aware that Americans are living longer.  For instance, in 2005, for every 100 middle aged individuals, there are 114 U.S. residents over age 65. By 2025, for every 100 middle aged individuals, there will be 253 seniors!

(2) It's costing a lot more than expected for seniors to live - and far more to live then they expected and planned for.   40% of the 32 million Americans currently aged 65 and over will spend some time in a nursing home at some point in their lives. On the aggregate, of those who enter a nursing home, 50% will stay an average of 2.5 years; 10% will stay there five years or longer.

(2)  Long term care is not solely a "senior" issue. An astounding 40% of people who need long term care are working-age adults between 18 and 64!

Although we are living longer, "living longer" is not always synonymous with "living better." The longer we live, the more likely it is that at some point in our lives, we will need someone to help take care of us.

WHAT'S IT ALL ABOUT, ALPHIE?

Frankly, my dears, it's all about MONEY!   In spite of the fact that many seniors are "wealthy", long term care costs are enormous and a lifetime of savings can be quickly exhausted when long term health care becomes necessary.  Consider that:

70% of single people who enter a nursing home are impoverished within one year.

50% of all couples are impoverished within one year of one spouse entering a nursing home.

Nursing home care in 2003 cost an average of $66,000 per year for a private room. [My mother shares a room and her nursing home bills average about $6,000 - a month!] Currently, costs of $100,000 or more are not unusual in many regions.

Estate planning attorneys, accountants and other financial services professionals often neglect asking themselves and their clients:

"What would you do if you were suddenly faced with

an additional yearly expense of $60,000 - $100,000?

 

(This could double for a couple both of whom needed care simultaneously)

"How would this impact on your retirement planning?"

"How long could you afford these costs?"

"How would this additional expense affect the estate you wish to leave your children?"

"How concerned are you about assuring that

you maintain your financial security and independence?"

Long term care insurance, although not a perfect solution, is at least a partial answer to some of these troubling questions.

Although approximately 1.9 million people have already purchased private long term care insurance, that number comprises only about 5.9% of the 32 million Americans over age 65.

LONG TERM CARE AND LONG TERM CARE INSURANCE (LTCI)DEFINED:

Long term care refers to a wide range of health related social services and professional care provided formally or informally. It is care which provides preventative, rehabilitative, therapeutic, supportive, and maintenance care for individuals at any age who have certain functional impairments. These are usually defined as inabilities to perform activities of daily living for more than 90 days due to a chronic physical and/or mental condition.

Long term care can be provided in one's own home (for instance, the Quakers in Philadelphia have a wonderful service), a rehabilitative setting, a convalescent or nursing home, a personal care facility, or in an adult care setting.

Long term care insurance means an insurance policy or rider which will provide (via a prepaid; indemnity, expense-incurred, or other benefit basis) coverage for at least 12 consecutive months in a setting other than a hospital. Services paid for by such insurance include medically necessary diagnostic, preventative, therapeutic, rehabilitative, maintenance or personal care.

Note that insurance policies offered primarily as a Medicare supplement, basic hospital or medical/surgical expense coverage, disability income, or related asset protection coverage, accident only coverage, specified disease or accident coverage or limited health coverage are not considered "long term care insurance". These type contracts provide benefits for "acute care" rather than chronic conditions.

Although long term care insurance was first introduced over 25 years ago, it is a relatively new type of private insurance. There is an enormous variety of products currently available and comparing "apples with apples" is a relative impossibility. There are nursing home only products, comprehensive plans paying for care in a variety of settings, riders on life insurance policies, and home health care only plans.

In addition, daily benefit amounts, deductibles, benefit periods, waiver of premium and pre-existing conditions features, inflation protection guarantees, age limits, etc. vary enormously from company A to company B, from company A's plan A to company A's Plan B, and from company A's plan A in one state to company A's plan A in another state.

MEDICARE PAYS FOR MOST LONG TERM CARE NEEDS, RIGHT?

Wrong!  Even though many people mistakenly believe that Medicare will take care of most long term health care costs, Medicare pays for less than 2% of those expenses!  A survey conducted by AARP (American Association of Retired Persons) showed that 79% of those expecting to need nursing home care incorrectly believed that Medicare would pay.

Medicare will pay for long term care in a nursing home -  only if the following requirements are met:

A.      "Skilled" care is being provided to the individual in the nursing facility. Skilled care is continuous 24 hour per day care provided by licensed medical professionals under the direct supervision of a physician. The problem there is that only about 1/2 of 1% of all nursing home residents receive skilled care. Most residents get either "intermediate" (4.5% of nursing home residents) or "custodial" care (95% of nursing home residents).  Intermediate care refers to occasional nursing and/ or rehabilitative care under the supervision of skilled medical personnel. It is often referred to as "intermittent" care and may include physical therapy, occupational therapy, speech therapy, etc. "Custodial" care often involves non-medical personnel such as nurses aides who provide assistance with the activities of daily living including bathing, eating, toileting, transferring and dressing.

B.      The nursing facility is a "Medicare participating" nursing facility. Many nursing homes will not qualify under this requirement.

C.      The nursing home care must follow (within 30 days of discharge) at least a three day hospital confinement. Most often those who require nursing home care do not enter directly after a hospitalization.  Often individuals are simply aging and finally realize they cannot manage any more at home or in a relative's home. (Since nursing home confinement frequently does not follow a hospitalization, many states now prohibit prior hospitalization prerequisites in long term care policies).

D.      The care the individual receives must be "restorative" in nature. The patient must be getting better.

If an individual meets all four of these requirements, Medicare will pay all of the costs of the first 20 days and all but $119.00 (in 2006 adjusted annually) for an additional 80 days. (At a current daily nursing home rate of about $200 or more, one obviously cannot depend on Medicare to pay for most of the cost for these other 80 days.) Beyond day 100, Medicare will pay nothing.

Medicare will pay for long term care in a home health care situation only if the similarly stringent and difficult to meet requirements are met. Home health care coverage includes part-time or intermittent skilled nursing care, physical therapy, and speech therapy through a Medicare Certified Home Health Care Agency. If the patient requires skilled nursing, physical therapy, and/or speech therapy and if the individual is confined to the home and is under the care of a physician, Part A of Medicare can pay for some other services.

A typical individual who requires nursing home or home health care is someone with a physical disability who simply needs help with the activities of daily living - someone who is simply aging. Medicare will not pay for such custodial care. Alzheimers patients, Parkinsonians, stroke victims, and those who have other organically related mental disorders, form another large group of those who need long term care. Typically, since these chronic ailments of aging don't "get better", Medicare benefits are not available.

The bottom line is simple: A wise person will not count on Medicare to pay for long term care services.

WELL, IF MEDICARE WILL NOT PAY FOR LTC COSTS, SURELY MEDICAID WILL, RIGHT?

Wrong again!  Medicaid is the Federal/State program of medical assistance administered by each state according to designated federal requirements and guidelines. The program is financed from both state and federal funds.  Currently, Medicaid pays about 40% of all nursing home expenses in the United States. In Massachusetts, one of the nation's wealthiest states in terms of per capita income, 75% of the state's nursing home patients are on Medicaid.

Although Medicaid was designed for the poor, many individuals approaching retirement age have attempted (in vain in many cases) to find ways of disposing of or "hiding assets" so that if they ever need to enter a nursing home, they can qualify for Medicaid. In addition to a legal, moral, and ethical dilemma of "hiding assets" - which is only a dilemma for some - are many more significant potential legal and practical economic problems which must be faced:

Problem 1: The 60 Month Look Back:

On February 8, 2006, President Bush signed The Deficit Reduction Reconciliation Act of 2005.  See also LISI ElderCare Newsletters 4, 5, and 6 at http://www.leimbergservices.com .   These changes make it more difficult than ever to qualify for Medicaid eligibility.

·        The look-back period for transfer of assets is now 5 years (instead of 3 years) for ALL SITUTIONS prior to applying for Medicaid coverage.

·        In addition, legislation will deny Medicaid coverage for nursing home care to any applicant with home equity above $500,000 ($750,000 in some states).

Problem 2: Gift Taxes:

Giving money away can frequently be more expensive than keeping it and finding other ways to protect it. Both federal and state gift tax laws (imposed in a number of states) must be considered.

Problem 3: Too Much Income:

Even if you do manage to effectively give away all of your assets, "spousal impoverishment" provisions allow the non-confined spouse to keep only financial assets up to a maximum of $99,540 (2006) and the at-home spouse can keep the primary residence, a car, personal and household effects, and a small amount for burial.

But many individuals have too much income to enable them to qualify for Medicaid. Depending upon the state and whether or not you are married, an income somewhere between as little as $1,603.75 or no more than $2,488.50 per month may disqualify one from receiving Medicaid benefits!

Social security benefits and pension benefits will be counted as income even if they are given away by the recipient. They can not be hidden or diverted in order to qualify for Medicaid. Furthermore, the income tests vary widely state by state and differ for married and single individuals. Some states have a medically needy category which allows medical expenses to offset income before applying the income test.

Problem 4: Loss of Independence:

Most individuals do not enjoy the prospect of asking their children - or whomever they have given assets - for money each time they wish to go on a vacation, buy a special gift, etc.

"May I please have…"

is not a phase parents want to become accustomed to using - with respect to their children.

Problem 5: Control of Assets:

Once one gives money away, legally it is no longer his. Attorneys have numerous, sometimes heart wrenching stories of parents who have given assets to children who have subsequently squandered those dollars through drug abuse, gambling, or just plain bad investments or poor luck. Even the "best" and "most loving" children are still subject to bankruptcy, divorce, law suits, etc. Sometimes children die before their parents and the parent's money sometimes does (and sometimes does not) return to the parents. But if it does, it will doubtless be reduced by the inevitable death taxes and other "slippage" that almost always occurs at death. And there's a definite possibility that - since most children expect to survive their parents - and draft their wills and trusts with that expectation - that the money may not go back to or be available by the parent who earned and owned the money in the first place.

Problem 6: Choice of Facility:

Many individuals have discovered all too late that "money talks". Many nursing homes accept both private pay and Medicaid patients; the nursing homes however, are frequently reimbursed at a far lower daily rate for a Medicaid patient than a private pay resident.  Suppose you were a nursing home owner or admissions officer. If you had two individuals requesting a bed - one who could pay privately at the full daily amount and one who had (or claimed to have) no money and would need to depend on Medicaid, whom would you prefer (and give preference to)?  Many of the finer nursing facilities require that the prospective resident be able to pay privately for six months, a year, two years, or even longer, before the application is even considered.

AND IF YOU ARE NOT CONVINCED AT THIS POINT…

After analyzing these six potential pitfalls of disposing of one's assets (and being prepared to use Medicaid if long term care becomes a necessity) some may still decide to follow this asset disposal route. Some attorneys who specialize in Medicaid planning suggest that over 90% of all Medicaid claims go unquestioned. They suggest that if one falls into the unlucky 10% and if the Medicaid claim is denied, the individual can always pay for long term care at that point with assets controlled by the client.  Of course, for those individuals for whom Medicaid is a necessity due to a dearth in income and assets, the entire question becomes moot.

ALTERNATIVES  TO NURSING HOME:

Any discussion of long term care insurance inevitably leads to the statement my Aunt Henrietta has made - about a hundred times - and as recently as last evening:

"I don't ever want to go to a nursing home."

Certainly, when people are asked to list their goals in life, "living in a nursing

home someday" is never on the list.

There are alternatives:

A. CCRC'S- Continuing Care Retirement Communities:

CCRC's can provide an alternative solution for many. Such communities vary enormously in their structure. Some provide life care i.e. an individual may start by living in an apartment, may move to an assisted living wing - where nursing staff is available if necessary and meals may be provided, and intermittently or finally move into the nursing home portion of the community.

Many such communities require up-front fees ranging from approximately $25,000 to $450,000 which may or may not be refundable in part or full upon the death of the resident. In addition, there are monthly fees ranging from a few hundred dollars to a few thousand dollars. Frequently, these communities self insure and guarantee lifetime health care for the residents. But are these guarantees based on appropriate actuarial evaluation and pricing?

Other communities are rental only/pay- as-you-go. In such environments the need for long term care insurance should be assessed in the same manner as with an individual residing independently in a home or apartment. Frequently, life care communities can be a very expensive route to take if the only motivation for living there is taking care of possible future health needs. In such a scenario it is often much more cost effective to purchase long term care insurance. If however, one is motivated by factors such as convenience, living among peers, social activities and programming, etc. a life care community is certainly a worthwhile option.

B. Adult Day Care Centers:

Adult Day Care Centers are similar to child day care centers with which we are more familiar. Adults who need supervision,due to cognitive and/or physical impairment, can be "dropped off" at the beginning of the day. Nursing staff and programming is available throughout the day and the individual returns home for the night. (Many of the newer long term care policies will pay for some adult day care.)

C. Home Health Care:

Home Health Care is another way of dealing with long term illnesses. Most individuals prefer to remain in their own homes for as long as possible. Most comprehensive long term care policies address this preference but will pay for home health care only if provided through a licensed home health care agency. Some policies will pay for home health care at a percentage of the full nursing home daily benefit amount. A new type of life care at home plan based on the concept of CCRC's (requiring an up front fee and a monthly payment) is now being marketed in some areas.)

D. Assisted Living

Some people who live in nursing homes do not really belong there.  Frequently, individuals can function very well in an assisted living or personal care facility. These are licensed facilities which often enable individuals to remain in an apartment-like setting. Meals are usually provided and nursing staff is available to help administer medicines, handle emergencies, assist when necessary. Often personal care facilities cost about one half as much as nursing homes. (Some long term care policies are now paying benefits for such facilities.)

CONCLUSION:

We financial services professionals need to do a better job of explaining the financial challenges that face our clients as they age.  Eldercare Planning is very much a part of estate planning - since - absent much thought and action prior to the time it is needed - many individuals will have little (or greatly diminished) estates to transfer to heirs.  LTC for our clients is a topic our clients' children should consider as a form of insurance for their own inheritances.

HOPE THIS HELPS YOU HELP OTHERS!

Carol Einhorn    
Steve Leimberg

CITE AS:

Steve Leimberg's Elder Care Planning Newsletter # 7 (February 23, 2006) at http://www.leimbergservices.com   Copyright 2006 Leimberg Information Services, Inc.(LISI) Reproduction in ANY Form or Forwarding to ANY Person Prohibited - Without Express Permission