NAMB/WEST: A message from the NAMB/WEST Advisory Committee
Forward on reverse: Medicaid rule change to boost demand for reverse mortgagesAtare E. Agbamureverse mortgage, Medicaid, Long-Term Care Reform, 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. It's 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. Medicaid's 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. That's 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, America's leading advocate for long-term care reform. Moses is president of the Seattle-based Center for Long-Term Care Reform Inc., and is the nation's 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, that's still a very high level. Medicaid is a means-tested public assistance program; it's 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 can't 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 that's an excellent way to ensure that one can pay one's 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, it's little wonder that most people didn't prepare for long-term care, didn't buy insurance and didnt tap the equity in their home. Why would you tap the equity in your home if it isn't at risk for your single biggest cost? Reverse mortgage lending has taken off in the last few years, but it hasn't been driven by long-term care expenses. It's 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 doesn't 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. It's 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 don't 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. We've 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 they're phony, but Medicare and Social Security at least have trust funds. Medicaid doesn't. We've 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] isn't done, consumer behavior won't 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. It's basically education. Without being immodest, there is nobody in the country that understands it better than I because I've 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 isn't 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 don't 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 it's 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 shouldn't 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 won't be there in the future for me. 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.