In a rapidly aging America, Medicaid can be a lifeline for long-term care 

Caring for an elderly or permanently disabled family member is a gut-wrenching experience for many families. Not only that, but it’s expensive, often exhausting personal savings and resources. 

The United States, like many other rich countries, is aging fast, and that means more Americans with diminishing cognitive function and physical disabilities as well as the loss of independence. Providing such care is intensive. In the case of nursing homes, where residents have the most severe needs, round-the-clock attention is especially expensive.

Most fund these things through the Medicaid program, but this can come with an unreasonably steep cost. The private sector has a simple solution to offer, but it might require a change to the system.

Medicaid is the largest payer for long-term care services and supports for the elderly and disabled, accounting for 42 percent of all expenses in 2020. However, Medicaid is traditionally for the disabled and poor. To receive long-term care services and support benefits, applicants who do not meet the income and assets requirements must “spend down” their resources and transfer all income to the program.

In addition, Medicaid rules mandate states to recoup the cost of long-term care services and support from the estates of beneficiaries after they die. In addition to being ineffective, estate recovery laws make it difficult to bequest assets to one’s offspring, thereby reducing opportunities for creating generational wealth.

It is just a shame for people to spend their lives accumulating modest assets only to have to spend them down in the last few years of life. Another option for financing long-term care services and support is buying long-term care insurance, but unfortunately, only about 1 in 10 among the elderly and those in need of long-term care have done so. Thus, Medicaid long-term care services and support benefits should be restructured to incentivize the purchase of private long-term care insurance.

With life expectancy likely to return to its upward trajectory as we put the pandemic behind us, we shouldn’t wait. The government and other researchers estimate that the average person will require about $138,000 for long-term care services and support, even though not all will need such expenditures. About 1 in 25 will need more than $250,000. Bolstering Medicaid to cover it all isn’t realistic, either. Its expenditures on long-term care services and support keep rising and only 5 percent of the population now consumes one-third of its entire budget. 

Unfortunately, the reason so few people use long-term care insurance for their long-term care is that the premium rates are often too high. For example, a $165,000 policy would cost the average 55-year-old male $950 per year, rising to $2,500 by age 65.

The market for long-term care insurance has also been shrinking. In 2004, there were 114 insurance companies issuing long-term care insurance policies. By 2022, there were only 17 or 18. There are many reasons for this, but it’s primarily because, during the boom years of the early 2000s, insurance companies underestimated the claim payouts, which led them to charge lower premiums than required to make any profits

We now have a vicious cycle where because there are fewer and fewer people buying insurance, the cost of an individual policy keeps going up. For example, in 2022, the average premium rate increase approved by state insurance commissioners was 37 percent. This is unsustainable. Another reason for the low uptake of private long-term care insurance is the lack of knowledge about the need for it and the available options.

To address this problem, we need to encourage more Americans to buy private long-term care insurance. The first step is to change Medicaid from the “payer of last resort” to the first payer. That is, we should eliminate the “spend-down” requirements. People who are poor and would require assistance can remain covered by the program as is. However, with the change, there would be no need for those who qualify for Medicaid through spend-down rules to use intended and unintended loopholes to shield their assets due to eligibility requirements or to protect their estates.

Here’s how it might work: Medicaid provides any long-term care recipient with a means-tested, income-adjusted payment capped at the average long-term care services and support cost for the year. For example, it could use the average income of the past five years before the onset of long-term disability to determine the eligible amount; the higher the income, the lower the amount.

How will this rearrangement encourage the purchase of long-term care insurance? First, the Social Security Administration would send a notice to everyone turning 50 that there is a defined benefit for long-term care services and support should the need arise. It would include the individual’s estimated benefit amount and the resources to purchase supplemental long-term care insurance. In addition, it would remind recipients that current laws allow the limited use of health savings accounts to pay for long-term care insurance. As more people buy insurance, long-term care insurance premiums should go down.

This will not be an overnight change, but over time, it should nudge many more people toward purchasing the insurance they are likely to need.

Kofi Ampaabeng is a health economist, senior research fellow and data scientist with the Mercatus Center at George Mason University.