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National Mortgage Professional
Aug 24, 2006

Forward on reverse: DRA 2005: A conversation with Stephen A. Moses of the Center for Long-Term Care Reform Inc.: Medicaid rule change to boost demand for reverse mortgages type author here..type keywords here..SEPERATE BY COMAS ONLY(,) By Atare E. Agbamu, CRMS [Photo: Atare E. Agbamu] [Photo: Steve Moses] If you are in the business of marketing and originating reverse mortgages, or if you aspire to be, pay close attention to Medicaid, Medicaid eligibility and long-term care finance issues. It is about keeping an eye on the forest and the big issues that will drive demand for reverse mortgages for decades. Its strategic stuff. For more than 40 years, Medicaid, a federal/state program designed to help the poor, has been paying for long-term care for almost everyone in the United States. Medicaids long-term care financing for everyone is about to change because it is eating up states budgets. Some experts in Medicaid and state budgets say that if the pace of Medicaid financing for long-term care goes unchecked, it will bankrupt the states. Others say government financing, whether through Medicaid or some other program, is the solution. With 78 million baby boomers coming down the long-term care financing pipeline in the next 20 years, federal and state governments are scared. With a lot of push from the states and others who care about preserving Medicaid for the needy, Uncle Sam has changed the rules. The new rules are located in the Deficit Reduction Act of 2005 (DRA 2005), signed into law by President George W. Bush on Feb. 8, 2006. The new rules of Medicaid eligibility say that you are responsible for your long-term care financing unless you are truly poor. Personal responsibility for long-term care financing means alternative financing. Reverse mortgages are a part of alternative financing tools for long-term care. Thats why you and I should add Medicaid, Medicaid eligibility and long-term care financing know-how to our reverse mortgage education. It gives us a competitive edge in our reverse mortgage marketing efforts. To help us understand the business implications of DRA 2005 for the emerging reverse mortgage industry and the opportunity it holds for reverse mortgage lenders and aspiring lenders, I share with you a conversation that I had with Stephen A. Moses, Americas leading advocate for long-term care reform. Moses is president of the Seattle-based Center for Long-Term Care Reform Inc., and is the nations leading authority on long-term care financing. The center is a champion of universal access to top-quality long-term care by encouraging private financing as an alternative to Medicaid dependency for most Americans. Moses has been involved in health care financing issues at federal and state levels since 1979. His research and advocacy influenced the design of Medicaid rules in the Omnibus Budget Reconciliation Act of 1993 (an earlier federal law which tried to curb Medicaid shenanigans) as well as DRA 2005. A frequently quoted and consulted author and speaker, Moses is a one-man crusader for long-term reform in the United States. He has spoken before the U.S. Congress and two-thirds of the state legislatures in the nation. If anyone deserves the moniker Father of Long-Term Care Reform in America, it is Stephen Moses. The following is the first part of my conversation with Stephen Moses on the impact DRA 2005 will have on reverse mortgage business: Atare E. Agbamu: Steve, why is DRA 2005 important for the reverse mortgage market? Stephen A. Moses: It is important because until now, Medicaid has exempted home equity with no limit. One could own a home, including all contiguous property, regardless of value. This could be a 10,000-acre ranch in Montana, Bill Gates big house on Lake Washington in Seattle or any mansion anywhere, and you could qualify for Medicaid. There were other income and asset restrictions, but those were avoided as well. What has changed is that there is now a limit of $500,000 in home equity for people to retain and still qualify for Medicaid. Now, thats still a very high level. Medicaid is a means-tested public assistance program; its welfare. And to be able to retain the value of half a million dollars and get the government to pay for your long-term care, which can be very expensive, especially in a nursing home, is extremely generous. Just to put it in perspective, in Britain, they only allow $36,000 in home equity to be exempted to qualify for publicly financed long-term care. In Germany, they have a 10-year look back on the transfer of assets, whereas we have only moved the look back period on asset transfers five years in this country. So, the irony is that America, with a supposedly free-market capitalist healthcare system, is far more generous than the so-called socialized healthcare system in western Europe. If people cant exempt unlimited home equity, they would be less likely to hide money in home equity to qualify for Medicaida common practice until now. And if they do have home equity in excess of $500,000, they are far more likely to take out a reverse mortgage to reduce their equity down to the allowable level and use the proceeds from the reverse mortgage either to supplement their income so they can buy long-term care insurance or to pay for community-based services to help them remain in their home and delay or prevent altogether nursing-home institutionalization and Medicaid dependency. So, [DRA 2005] is a very, very positive development. It sends the message to the public that long-term care is a personal responsibility, that you can no longer preserve unlimited assets and get the government to pay for your long-term care, a program that was really intended as a safety net for the poor and that therefore, you should plan to be able to pay personally for your own long-term care. The best way to plan is early planning with private insurance; but failing that, if one gets to be 62 years of age and eligible for a reverse mortgage, then thats an excellent way to ensure that one can pay ones own way. AA: Why should reverse mortgage lenders support the effort to educate the American public on the new Medicaid limits on exempt home equity? How should reverse mortgage lenders go about this educational process? SM: First of all, they should educate themselves. Reverse mortgage lenders are no more knowledgeable about the effect of Medicaid eligibility in the past on the marketability of their product than are long-term care insurance industry agents and officials. Very few people marketing reverse mortgages or long-term care insurance understand that the primary reason their products have not sold very well in the past is that Medicaid was readily available to cover the single biggest risk the elderly faced financially. People could ignore the risks, avoid the premiums for private insurance, wait until they got sick, shelter all of their income and assets including their home equity and get the government to pay for their long-term care. As long as that was true, its little wonder that most people didnt prepare for long-term care, didnt buy insurance and didnt tap the equity in their home. Why would you tap the equity in your home if it isnt at risk for your single biggest cost? Reverse mortgage lending has taken off in the last few years, but it hasnt been driven by long-term care expenses. Its been largely a function of interest rate collapse, and seniors are dipping into their home equity in order to retain their income levels and normal standard of living. Now that Medicaid doesnt protect an unlimited level of home equity, the public needs [reverse mortgages] much more than was ever the case. Once they understand it themselves, they should begin educating the media about this reality. The reporters that are writing many positive articles lately about how to use reverse mortgages to retain a decent lifestyle will also be talking about the importance of using home equity to ensure access to quality long-term care, particularly in the home. This new law will mean nothing unless the states implement it, the feds enforce it, the media publicizes it and reverse mortgage lenders and insurance agents sell it. Its critical at every stage that the industry involved in marketing the products that can help people get access to quality long-term care [is] out aggressively promoting all of those laws: encouraging states to implement the rules, the feds to enforce them, the media to publicize them and their salespeople to sell them. Otherwise, if we dont get the public awakened to the importance of planning for long-term care, even using their home equity, we are going to see the age wave crest and crash on us over the next 10 or 15 years in a way that will likely wipe out many of the supports that have been there in the past. Medicare has a $60 trillion unfunded liability. Weve just added Medicare Part D, which is another $8 trillion that is completely unfunded for the future. The Social Security program has a $10 trillion unfunded liability. Medicaid, the primary funder of long-term care in this countrynobody is even calculating the unfunded liability there because the money comes directly out of general funds and there is no trust fund. Never mind that theyre phony, but Medicare and Social Security at least have trust funds. Medicaid doesnt. Weve got a whole house of cards here. Government entitlements that have anesthetized the public to the risk of long-term care are about to come tumbling down during the next 20 years and smart people should be preparing now for that eventuality, particularly in the area of long-term care. These are things that reverse mortgage lenders need to understand. They need to train their salespeople on the fiduciary responsibility to their clients to explain these facts of financial life to people. As they do so, more and more people will see the light and buy their products. But if [the education] isnt done, consumer behavior wont change. AA: So, it is not just enough for reverse mortgage marketers and originators to know about reverse mortgages. What should the long term care financing curriculum be for reverse mortgage lenders? SM: The simplest and most direct way to do that is to retain the Center for Long-Term Care Reform, through me, to speak at their conferences, to write for their publications and to do op-ed articles for local newspapers. Its basically education. Without being immodest, there is nobody in the country that understands it better than I because Ive done nothing but this since the early 1980s when I was a career U.S. government employee of the Health Care Financing Administration, doing the early studies that identified the problem of Medicaid planning. And I have been working ever since to give Medicaid back to the poor and to get everybody else planning responsibly. If people understand the importance of planning for long-term care, a lot more people will take out reverse mortgages, but that isnt going to happen unless the salespeople understand what has changed in Medicaid law and unless they convey that reality to their clients. I am making the observation that while you dont want to use this new change as a scare tactic, you do have a fiduciary responsibility to the public to warn them that the rules have changed and that they will be personally responsible in the future for their long-term care and that they should be preparing through insurance and through the use of home equity [reverse mortgages] to pay their own way for long-term care. The benefits go beyond avoiding any penalties or consequences that are in the law. It is well known that Medicaid has a dismal reputation for problems of access, quality, reimbursement, discrimination, institutional bias, loss of independence, welfare stigma and so on. When people understand the problems associated with ignoring long-term care until its too late and then depending on Medicaid, I think a lot more of them will use their home equity [reverse mortgages] and buy insurance rather than end up in nursing homes. AA: It appears that most of those who will be attracted to home equity, based on the $500,000 cut-off, will be those in the upper income or upper asset brackets, right? SM: No, it shouldnt be at all. What this should be is a way to convey to the public that home equity is now at risk. They place the limit this year at $500,000, but as I said, in England, the limit is $36,000. I think there is every possibility that next year, Congress can take it to $250,000, and a year after that, maybe to $50,000. The message the public should receive is that while the rules remain very generous, the whole trend is in a downward direction toward preserving Medicaid as a safety net for the poor and conveying the message to the public that they need to plan. If I were of an age where I was concerned about long-term care now and I had a home, even with $250,000 in equity (which would still be exempt for purposes of Medicaid), if I needed the income from that home through a reverse mortgage to supplement my income so that I could afford private insurance and I was still healthy and medically qualified, it would be a very sensible reason to take out a reverse mortgage in anticipation that Medicaid wont be there in the future for me. Atare E. Agbamu: You believe that everyone should plan for long-term care, based on the signal that has been given by Deficit Reduction Act of 2005 (DRA 2005), right? Stephen A. Moses: Well, I believe everyone should have been planning for long-term care all along. Going bare and ending up on Medicaid has been a dismal outcome for many, many years, but it is much more obvious now because of the changes in DRA 2005. AA: And you think that the limit will keep dropping from $500,000 over the next several years, right? SM: They have to. Medicaid is bankrupting the states. They cant go on providing expensive nursing home care for affluent seniors. All you have to do is look at the handwriting on the wall. AA: Was there anything in the legislative history of DRA 2005 that suggests a lower limit in 2007 and in coming years? SM: The National Governors Association recommended most of the changes that ended up in DRA 2005, and their recommendation was to take the Medicaid home-equity exemption to $50,000. The governors were recommending it for this time around. The legislators & you know, its a very politically sensitive thing. There was a lot of opposition, and they got as low as they could get it on this round. But believe methey are going to be fighting to get it lower in the future. Either that or Medicaid would collapse entirely. AA: You said the states recommended $50,000. So that is an indication of what is coming, right? SM: Yeah, thats what I think! I think people are pretty naïve if they expect Medicaid to go on paying for two-thirds of residents and 80 percent of all patient days in nursing homes. Its just too expensive. It cant continue. Trends that cant continue wont, as one wag once said. AA: You talked about Long-Term Care (LTC) Partnerships in your LTC Bullet. What do you mean by LTC Partnerships? SM: LTC Partnerships was a program promoted by the Robert Wood Johnson Foundation going back to the late 1980s. Its an incentive to buy more long-term care insurance, thereby forgiving Medicaids spend-down liability. The way it usually works is this (its a little different in New York): If you bought $100,000 worth of insurance and used it up, then instead of having to spend down to $2,000 of assets to qualify for Medicaid, you could retain $102,000. Now, in 1993 when Congress mandated estate recoveries (thats if you were on Medicaid), the state was required to go into your estate and recover the costs of care provided to you. Congressman Henry Waxman, who at that time chaired the House Energy and Commerce Committee, refused to exempt the partnerships that have already been set up from the estate recovery requirements. So while they could continue to exempt the money up front for purposes of eligibility, they could not exempt it from the estate recovery requirements. Because of that change, no more partnerships took effectin essence, eliminating the incentive that was there to preserve assets by buying insurance. Now that restriction has been lifted. States can exempt not only the money on the front end but also on the back end from estate recovery. It means that the four Long-Term Care Partnerships that exist now can be expanded in any state in the country that wants to set one of these programs, as long as they meet the requirements in the lawthey have to be in concord with rules of the National Academy of Insurance Commissioners, they have to be IRS-qualified long-term care insurance policies and so on. The insurance industry fought hard for the expansion of the partnerships. I think it is not nearly as important as the Medicaid eligibility changes for a simple reason: Why would anybody buy insurance to avoid a Medicaid spend-down liability that doesnt exist in the first place? AA: There is a lot of long-term care terminology that most of my readers may not be familiar with. What do you mean by spend-down liability? SM: Technically, the way Medicaid is always presented is that you can only retain $2,000 in assets. Other than that, youve got to spend down your own money for your long-term care until you become impoverished. The reality is that there is no limit on how much income or assets you can have and still qualify for Medicaid long-term care. You determine income eligibility by first deducting from a persons income the cost of private nursing home care, coinsurance and deductible for Medicare, coinsurance and deductible for Medicare supplemental policy and all of the medical expenses seniors pay for that Medicare doesnt cover, like foot care, eye care, dental care and pharmaceuticals. And if they still dont have enough income to pay for everything, they are eligible for Medicaid. Then, the assets: While technically you can only retain $2,000, you can have a home and all contiguous property regardless of value. That was true until DRA 2005. Now, its limited to half a million dollars. But you can still retain a business, including the capital and cash flow of unlimited value, an automobile of unlimited value, pre-paid burial funds of unlimited value for every member of the family (not just the Medicaid recipient and spouse) [and] unlimited home furnishings. In essence, as long as you hold the assets in exempt form, there is no limit on how much you can have in assets and qualify for Medicaid. While DRA 2005 has created some additional restrictions on the diversion and divestment of assets, it doesnt really get to all of the methods people can use to retain assets and qualify [for] Medicaid. AA: What is the way forward then, in terms of creating incentives for people to use reverse mortgages? SM: Well, [there is] any number of things they can do to incentivize people to use home equity for long-term care insurance and home equity for long-term care. A lot of these ideas are being talked about similar to the partnerships for long-term care insurance, where you give people an extra benefit if they use home equity to purchase long-term care; but they do cost money. The reason they tend not to pass is that the Congressional Budget Office (CBO) scores them as being very expensive. The CBO doesnt take into consideration the ultimate savings down the line. If they did, they might be more likely to pass those incentives. But here is the critical thing: No amount of incentives is going to encourage people to buy long-term care insurance or take out reverse mortgages as long as they can ignore the risk, avoid the premiums and wait until they get sick, shelter the home and get Medicaid to pay for their long-term care. It is the Medicaid eligibility stuff that is critical. And as I said before, weve made some progress on that, but we still have a long, long way to go to make sure Medicaid is a safety net for the poor and not a hammock for the upper middle class. And if we do that, whether or not we get tax incentives and other publicly financed incentives for these products (reverse mortgages and long-term care insurance), people will buy them. AA: So the key, to repeat what youve just said, is to make Medicaid eligibility more restrictive, right? SM: Well, to target Medicaid to the genuinely needy. If you do that, you will save more than enough money to pay for the incentives to get other people to plan for long-term care. We just have way too many people dependent on welfare for long-term care and way too few people planning responsibly to pay their own way, and those are directly related. Its a fact that for 40 years weve been able to just ignore care and get the government to pay. That has caused low market penetration of reverse mortgages and long-term care insurance. If you get Medicaid out of the business of giving away for free what wed like people to do for themselves, youll see people taking out reverse mortgages and buying long-term care insurance. Atare E. Agbamu: What do you think is going to happen if people dont get the message about the relationship between Medicaid and reverse mortgage sales? Stephen A. Moses: If people dont get the message, well just continue on the course weve been on. Medicaid will collapse. A lot of poor people will be hurt. And the baby-boom generation will have no way to pay for long-term care except [for] their home equity. They wont buy insurance; when the time comes, Medicaid wont be there for them and they will have to use their home equity. Regardless of whether we solve the problem through responsible public policy or just leave it alone and let Medicaid collapse, both the reverse mortgage industry and the long-term care insurance industry are going to explode in popularity, because that will be the only way to pay for decent long-term care. The tragedy is that a lot of poor people will get hurt. And a lot of young people wont get inheritances from their baby-boomer parents similar to what baby-boomer parents are getting from their World War II generation parents. AA: What do you say to people who say premiums for long-term care insurance are just way, way [expensive] for most people in their 70s? They will not be able to get the right policy at the right price because they may have pre-existing conditions and other factors that could disqualify them from getting a better policy. SM: Well, you cant buy fire insurance when your house is in flames, and you obviously cant buy long-term care insurance when you already have Alzheimers disease. Most people who make those kinds of arguments are totally unrealistic about economics, and the idea that you can now transfer this risk to government programs that are already bankrupt just covering what they have already covered is just so economically and philosophically irresponsible that its frankly kind of sickening. The reality is a vast majority of people can afford long-term care insurance if they purchase it at the most appropriate time of their lives. Its cheaper when they are younger. But if they are raising a family well, then maybe later on if incentives are in effect. The children that they raised, if they are in responsible positions, can supplement the parents to afford long-term care insurance. The main thing is that there should be an incentive to buy it and an incentive to use home equity if they dont have the other resources to afford it. Those incentives have not been there in the past; as a consequence, both the long-term care insurance and the reverse mortgage industries have been under-developed. Those incentives are developing, per small step of the Deficit Reduction Act of 2005. There will be more restrictions in the future. So you will see people re-evaluating the risk such that theyre willing to pay more toward the purchase of long-term care insurance. As they see the need for it and as the need becomes real, theyll be more and more likely to tap their home equity to help them afford it. In your 70s, long-term care insurance gets expensive. I purchased it for my parents in their mid-70s in 1989. Ive paid the premiums ever since, because I dont think they should have to pay the premiums on insurance that protects my inheritance. And Ive a policy for myself and my wife that Ive [been paying] for 10 years. I am part of the solution. I pay my taxes in order to preserve Medicaid as a safety net for the poor. What I resent is paying taxes that support people who hire attorneys to get rid of their assets in order to take advantage of a program thats supposed to be for the poor. Theyve basically ruined Medicaid as a safety net for the poor. And my mission and the mission of my organization, the Center for Long-Term Care Reform, is to give Medicaid back to the poor and encourage everyone else to plan responsibly for long-term care, which they can and should afford to do if they put the proper priority on that risk. AA: Do you have any closing remarks for reverse mortgage lenders? SM: I think they should wake up, smell the coffee, take it upon themselves to learn more about the relationship between public and private long-term care financing, and then get involved in publicizing this and educating their salespeople so that we can get the word out to the public that long-term care is a risk for which they need to take responsibility in the future. AA: Steve, thank you very much for this opportunity. For more information about Stephen A. Moses and his mission at the Center for Long-Term Care Reform, visit www.centerltc.com. Atare E. Agbamu, CRMS is president of ThinkReverse LLC, a reverse mortgage training and consulting firm based in the Twin Cities and is a consultant with Credo Mortgage. Atare is regarded as an emerging authority on reverse mortgages and is frequently consulted by financial professionals and families across America. His reverse mortgage interviews have been Web cast on MortgageMag Live! He can be reached by phone at (651) 389-1105 or e-mail atare@credomortgage.com. For more information about Stephen A. Moses and his mission at the Center for Long-Term Care Reform, visit www.centerltc.com.
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