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
[email protected]. For more
information about Stephen A. Moses and his mission at the Center
for Long-Term Care Reform, visit www.centerltc.com.
