Planning for long-term care without public assistance.

People always have been afraid of dying too soon. Lately, they worry more about living too long. The fear of chronic long-term illness leading to loss of independence and catastrophic health care costs is widespread among the growing ranks of America's elderly. No greater threat to the physical and financial well-being of older people exists. Seniors and their families turn to professionals they trust for guidance in handling this risk. What CPAs tell their clients about financing long-term care (LTC) may be the most important counsel they ever give. Unfortunately, this subject is muddled with complexity, replete with misinformation and fraught with malpractice risk. This article explains these pitfalls and plots a safe course around them for professional financial advisers.

DEMOGRAPHIC ARMAGEDDON

The health care minefield seniors face today will become a nuclear bomb for their children's generation. America's population over age 65 doubled between 1950 and 1980; it will double again by 2030. The segment of the elderly over age 85, by far the most vulnerable, is growing three to four times as fast as the general population. While only 14% of the "young old" (those 65 to 74) are disabled, 58% of the "old old" (those 85 and older) are functionally dependent, 47% have Alzheimer's disease and 22% already live in nursing homes.

The demographic arms race is careening toward catastrophe. People over 65 have 2 chances in 5 of entering a nursing home, 1 chance in 4 of staying more than a year, and 1 chance in 10 of remaining five years or more. Nursing-home costs average $30,000 per year within a range of $25,000 to $50,000. These expenses are increasing much faster than general inflation. The hope of avoiding high institutional costs with inexpensive home care is unrealistic. Hour for hour, the cheapest formal home care costs more than full-time nursing-home care.

Today, most LTC for the elderly is provided informally, at home and for free, by various family members. This resource is fast disappearing, however, as families disperse and women, the principal caregivers, join the work force. Simultaneously, there are fewer nurse's aides available at minimum wage to replace the informal caregivers.

The biggest blow, however, is the lack of financing for custodial LTC in nursing-homes. Medicare is no help. It pays on average only for skilled, recuperative care of less than a month. Medicare supplemental insurance policies offer little assistance. They piggyback onto Medicare's severely restrictive eligibility criteria. Veteran's benefits contribute little. They are already difficult to obtain and likely to dwindle rapidly as the number of veterans increases and defense budgets decline.

Finally, people waiting for the white knight of national health care to save the day probably are going to be disappointed, even with Bill Clinton's election as president. In 1992, interest payments on the national debt--which is $4 trillion and increasing at $300 billion per year--exceeded defense as the single biggest item in the federal budget. Even an inexpensive public program for custodial LTC would cost $43 billion annually. Under the circumstances, a big new tax-funded entitlement program is highly unlikely. In fact, we will be lucky to save the entitlements we already have. Half of all Americans say Social Security is doomed and experts agree Medicare will be bankrupt within 10 years.

LEGAL BOMB SHELTER?

There is one exception to the rule that government does not pay for custodial nursing-home care. Medicaid (title XIX of the Social Security Act), a jointly funded state and federal program, pays 43% of all nursing-home costs nationally. By law, medically eligible Medicaid patients receive unlimited, publicly financed custodial care in nursing homes of their choice.

Medicaid has an ostensible drawback, however. Conventional wisdom, as supported by clear congressional intent, suggests people must be poor to receive the program's benefits. Most individuals with more than $2,000 in assets or $422 of monthly income do not qualify for Medicaid. Such people are supposedly required to spend down their life savings to the impoverishment level before they are eligible. If this were really true, however, 67% of all people in America's nursing-homes would not be receiving Medicaid benefits. After all, only 12% of the elderly are poor.

The reality is much more complicated. Two factors explain the anomaly:

1. People who need nursing-home care are exempt from Medicaid's most draconian financial eligibility limits. In most states, for example, there is no limit on how much income a person can have and still qualify for Medicaid as long as nursing-home and other medical expenses are high enough to offset excess income. This is why two-thirds of the elderly poor and half of all poor children are not covered by Medicaid even for acute or emergency care, while people who need nursing-home care--the program's most expensive benefit--qualify with ease despite very high incomes.

2. Even the wealthiest of the wealthy can become eligible for Medicaid nursinghome benefits with careful legal planning. For example, anyone can qualify by sheltering countable resources in an exempt home or by taking advantage of a vast array of special trusts, transfers or other esoteric technicalities that are tantamount to old-fashioned tax planning. Statutory stumbling blocks like the mandatory 30month transfer of assets restriction or the optional estate recovery provision are easily circumvented legally.

In recent years, a new legal practice specialty has evolved to take advantage of these Medicaid eligibility loopholes. Elder law, a new-age version of estate planning, legitimately addresses the financial risks of disability during life in addition to the more traditional concern of disposing of assets after death. But good ends often are pursued through dubious means. Medicaid estate planning--the manipulation of income and assets to qualify otherwise ineligible clients for publicly financed nursing-home benefits--is the foundation of eider law practice today.

Whole law firms have sprung up specializing in the arcane field of Medicaid planning. Professional books and law journal articles on sophisticated income- and asset-sheltering techniques are commonplace. Continuing legal education seminars disseminate tools of the trade nationwide. Several newsletters are published on the subject. Popular self-help books for laypeople containing boilerplate trusts and step-by-step divestiture instructions enjoy enormous success.

FAUSTIAN BARGAIN

What exactly do clients get when they succumb to the lure of free nursing-home care? Medicaid is public assistance. It is not an entitlement like Social Security or Medicare. Supplicants or their representatives must fill out long, intricate welfare applications. They are required to disclose extensive personal and financial information accurately under penalty of fraud. They become dependent on the whim of state-employed social workers and eligibility clerks. All but a pittance of their personal income must go toward their care. Family financial aid to augment services is forbidden as it would constitute disqualifying income. Furthermore, Medicaid's reputation for lack of access, low-quality care, reimbursement problems, discrimination and institutional bias is dismal.

The U.S. General Accounting Office says patients "most likely to have to wait for nursing-home placement are those ... financed by Medicaid." Experts Alice Rivlin and Joshua Wiener of the Brookings

Institution write: "Nursing homes whose patients are mostly private generally provide higher-quality care than facilities dependent on Medicaid patients." Patricia Nemore of the National Senior Citizens Law Center charges nursing homes "discriminate against Medicaid recipients" with private pay requirements, special wings, evictions and inferior food and services. Medicaid's bias toward nursing-home care instead of home and community-based care is known as one of the program's most persistent characteristics.

Medicaid's largesse to the middle class is unlikely to continue. Total program costs have skyrocketed 10%, 18% and 25% in the past three years. Medicaid already consumes 14% of state budgets. Fiscal trend lines for the program point almost straight up. The federal government is trying to forbid states to raise extra money by taxing providers because it cannot afford to pay its share of the statutory match. State capitols resound with talk of cutting budgets, raising taxes and tightening eligibility requirements. Washington, D.C., is a buzz with talk of mandating liens as a condition of Medicaid eligibility and requiring recovery of benefits from prosperous recipients' estates. Without a doubt, public policy makers some day soon are going to give Medicaid back to the poor people it was originally intended to serve.

MALPRACTICE RISKS

Malpractice claims against estate planners are up sharply. Medicaid planning practitioners are particularly vulnerable on four different counts.

Eligibility. Medicaid nursing-home eligibility is extremely complex. Famous jurists have called it a "Serbonian bog ... almost unintelligible to the uninitiated." State and federal statutes, regulations and policies are almost constantly changing. One expert says 9 out of 10 attorneys give bad advice on qualifying for Medicaid. This is not a sideline practice for attorneys or financial advisers. Nonspecialists should refer all clients who insist on Medicaid planning to carefully screened experts in the field.

Who is the client? Most Medicaid planning occurs after a person has been institutionalized for a chronic long-term disabling illness. Because 63% of nursing-home patients are cognitively impaired, the odds are an institutionalized person is mentally incapacitated. Quite often, therefore, it is the family--usually a spouse or children--who asks the attorney or CPA for help. This creates a dangerous conflict of interest. The same people, especially heirs, should not make financial and health care decisions for a vulnerable eider. Anyone involved in Medicaid estate planning, however indirectly, must guard assiduously against this danger.

Program deficiencies. A serious failing in the extensive legal literature on Medicaid planning is it almost never discloses the program's deficiencies. Yet, anyone even vaguely familiar with gerontological scholarship knows the litany of problems recounted earlier concerning access, quality, etc. Medicaid planners and those who intend to refer clients to them should learn about these negatives. Some wise eider law attorneys already practice self-defense by requiring clients to sign forms acknowledging Medicaid's risks and the option of purchasing private LTC insurance.

Intentional planning for welfare. Most authorities take a dim view of this practice. Former Health and Human Services Secretary Louis Sullivan said: "Too many Americans lack access to basic health care; I do not think we can afford to drain the nation's health care program for the poor in order to support those who can protect themselves."

Henry Waxman, whose House subcommittee has jurisdiction over Medicaid, has chastised the legalistic "charade" of Medicaid planning, which he says shortchanges the program's intended clientele:the poor of all ages, pregnant women, children and the mentally retarded. Under these circumstances, whom besides their legal and financial advisers are the client and his or her heirs likely to blame if the government stops giving away nursing-home care to the middle class?

WHAT SHOULD CPAs ADVISE THEIR CLIENTS?

Once they know the facts, few lawyers or CPAs want to engage in Medicaid estate planning. Given the terrible health and financial risks associated with chronic long-policies cost on average $658 at age 50, $1,395 at age 65 and $4,199 at age 79. Such policies cover $80 per day for four years in a nursing-home after a 20-day deductible. They include some inflation protection. Obviously, the key is to buy young when the risks, and therefore the premiums, are very low.

Private LTC insurance has received some bad publicity. It is a new, experimental and largely unregulated industry. Caveat emptor definitely applies. On the other hand, most experts agree some of the 130 companies in the business offer excellent products. Certainly,. by comparison with the only other available options--Medicaid or catastrophic spend-down--private insurance is extremely attractive. The trick is to discern the best products of the better insurance companies.

Dozens of pamphlets, magazine articles and books are readily available to help people select the right LTC insurance product. Just as a CPA's client should not have to learn accounting, however, financial and legal advisers should not have to become insurance experts. Advisers should learn enough to ask the right questions, interview several representatives of the best products, select one or two trustworthy specialists and refer eligible clients to them. Return referrals should more than compensate for any lost Medicaid planning fees.

If the client is too old or too sick for insurance, the adviser should recommend private payment for home or nursing-home care. Private patients command red-carpet access to top-quality care. When they spend down to welfare levels, they can convert to Medicaid. At least the probability of re- maining in the preferred care situation is greater if patients pay privately for awhile. Fortunately, Medicaid now protects spouses and other dependents from impoverishment caused by a family member's LTC expenses. If heirs object to losing their inheritances, advisers should suggest they learn from the experience and buy insurance for themselves.

GROWING RISK

The risk of chronic long-term disabling illness in old age is high, increasing and extremely expensive. Professional advisers and their prosperous clients should ignore the fool's gold of public assistance. Advisers should recommend that every client buy insurance or pay privately, even if this means consuming an estate, and stay out of the Medicaid trap!

EXECUTIVE SUMMARY

* MANY ELDERLY AMERICANS fear chronic long-term illness leading to catastrophic health care costs. How to finance the cost of long-term care (LTC) may be the most important advice CPAs give their clients.

* PEOPLE OVER 65 have 2 chances in 5 of entering a nursing-home, 1 chance in 4 of staying more than a year and 1 chance in 10 of remaining five years or more. Nursing-home costs average about $30,000 annually.

* MEDICARE AND PRIVATE insurance generally do not pay for custodial nursing-home care. Subject to severe income and asset restrictions, Medicaid will pay for such care; in fact, Medicaid pays 43% of all nursing-home costs nationally.

* AMERICANS ARE increasingly engaging in complicated income and asset planning to enhance their Medicaid eligibility. Medicaid, however, has a dismal reputation for access, quality, reimbursement, discrimination and institutional bias.

* MEDICAID PLANNING IS fraught with risk for CPAs. Nursing-home eligibility rules are extremely complex. The client frequently is incapacitated and unable to make his or her own decisions. The program itself has considerable deficiencies, and the government takes a dim view of intentional welfare planning.

* FOR MOST PEOPLE, the best way to finance LTC is with private LTC policies or with personal assets. Private patients command red-carpet access to top-quality care. If nursing-home care is of extended duration, Medicaid will still be available later.

ADVICE ON WORKING WITH OLDER CLIENTS

The 1993 American Institute of CPAs conference "The CPA and the Older Client" will be held in San Antonio, Texas, June 28 and 29, 1993. Additional information and registration forms are available by calling the continuing professional education division at 1-800-TO-AICPA.

STEPHEN A. MOSES is director of research for LTC, Incorporated, Kirkland, Washington, which specializes in 1ong-term care financing and insurance. He was a senior Medicaid analyst with the Heatth Care Financing Administration and the inspector general or' the U.S. Department of Health and Human Services, Washington, D.C.