Explaining Long-Term Care

In the newly published third edition of his book, The Truth About Money (HarperBusiness), advisor Ric Edelman teaches the basics of managing personal assets and liabilities. While aimed at consumers, the book could serve as a handy reference guide for advisors (with the caveat that when it comes to insurance, check your state’s regulations). In this excerpt, Edelman explains how to cope with the financial burden of long-term care.

Long-term care insurance is an excellent example of how the rules of money have changed. Many people have not dealt with this subject for the simple reason that, until now, nobody ever had the need. In ancient Greece, for example, life expectancy at birth was 20. When the declaration of Independence was signed, life expectancy was still just 23; the median age was 16. Even as recently as 1900, most Americans died by age 47. These figures are confirmed by the percentage of Americans who reach age 65. In 1870, only 2.5% of all Americans made it. By 1990, that percentage had increased fivefold, to 12.7%. Today, 35 million people are over 65–and the figures continue to grow.

We can thank advances in medicine and public health for our newly extended lifelines. In 1900, communicable diseases were the leading causes of death, but today, most deaths result from here-dity, lifestyle, and the environment. How long are people living today? Life expectancy at birth is now 77. People in the fastest growing age group in this country are those over 85. If you and your spouse both reach age 65, one of you can be expected to live to age 90. And 90% of all the people in world history who ever reached age 90 are alive today.

Old cars break down more often than new ones, and the same is true for people. As our bodies wear out, we find ourselves requiring assistance with daily life. Called the Activities of Daily Living, insurance companies typically define these as eating, dressing, bathing, using the toilet, transferring (getting from bed to chair), and maintaining continence. The need for assistance with ADLs is so common, and the cost so large, that more than half the women and about one-third of the men who reach age 65 will spend some time in a nursing home–and the average cost of a nursing home is about $66,000 per year. Moreover, half of all older Americans who live alone will spend themselves into poverty after only 13 weeks in a nursing home. We’ll talk more about the cost of care and how to pay for it. But first, it is important that you become familiar with the three types of care:

Skilled Care. Defined as “continuously medically necessary,” these cases represent the horror stories about growing old: of people tied to their beds, connected to tubes, suffering from some chronic ailment. But in reality, only one-half of one percent of Americans require this level of care, so unless you have a medical or family history that predisposes you to it, it’s statistically unlikely that this will happen to you.

Intermediate Care. This is care provided under a doctor’s supervision. Only 4.5% of the nursing home population is in this category.

Custodial Care. All other long-term care patients–95%–receive custodial care, which is little more than room and board. It is based on the mere premise that you’re finding it difficult to maintain one or more of the Activities of Daily Living. Often, Mom is in a retirement facility because she cannot live alone at home anymore, and the kids are unable to care for her. And almost always, it is Mom. Wives survive their husbands 80% of the time, and 72% of nursing home residents are women. More than 85% of all women in this country die single–unmarried, widowed, or divorced.

Neither private medical insurance nor Medicare pays for long-term care. It’s simply not a medical need. So who pays? You do, until you can no longer afford it. But if you are wealthy and can afford the $66,000-plus annual cost, long-term care may not be a financial concern for you. If you are middle class, you must pay for the cost of long-term care from your income and assets until you run out of money. If you are poor (which is where many in the middle class eventually find themselves) and cannot afford to pay for the care you need, you will be covered by Medicaid.

A Crisis for the Middle Class

In reality, long-term care is a crisis for the middle class. The wealthy, after all, can afford the cost without sacrificing the lifestyle of their spouse or family members. And the poor enjoy a similar advantage, not because they can afford it, but because they are not required to. Thus, it’s the middle class that suffers the most, economically speaking. Unfortunately, those in the middle class also have the most misconceptions about who pays for long-term care. Health insurance does not cover this cost. And according to the U.S. Health Care Financing Administration, only under special circumstances does Medicare pay part of the costs of long-term care.

Medicare pays only if the patient has been hospitalized for three consecutive days within the 30 days prior to entering a nursing home (60% of patients fail this test). The facility must be Medicare-approved (only 20% of the nation’s 20,000 nursing homes qualify). Even if these two criteria are met, Medicare pays only for the first 21 days in full. Medicare requires a patient co-payment in excess of $100 per day for the next 80 days, and Medicare pays nothing after the 100th day. Medicare also stops paying as soon as your health care provider determines that your condition is chronic and is not going to improve–even if the 100 days are not yet up.

“No problem,” you say to yourself. “I’ll just become poor and get Medicaid to pay.” Before you try that, make sure you know the truth about Medicaid. If you decide to spend down your assets–or if you’re forced to–you need to know how Medicaid operates.

Medicaid places your assets into three categories: non-countable, countable, and inaccessible. Non-countable assets include your house (but only if you have a spouse who lives there), car, jewelry, household goods, personal effects, prepaid funeral, and $2,000 in cash. Countable assets include second homes and any additional cars, plus all savings and investments, including CDs, stocks, bonds, mutual funds, annuities, IRAs, and retirement plans–even the cash value of your life insurance policies. Inaccessible assets include gifts and anything placed into irrevocable trusts. These assets will be deemed by Medicaid to be exempt transfers (meaning gifts or transfers into trusts will be allowed) or non-exempt transfers (meaning the gifts or transfers are disallowed). If the transfers are deemed non-exempt, Medicaid will deny benefits for a period of time based on when the non-exempt transfers occurred.

Under Medicaid rules, the community spouse may keep non-countable assets, but is forced to liquidate countable assets. Furthermore, in most states, the community spouse is allowed a monthly income of less than $2,000; the institutional spouse is allowed $30 to $40 per month. Medicaid takes all income above those amounts, including Social Security income, pensions, interest income, annuity income, and alimony payments.

Although Medicaid will not take your house if a spouse lives there, you will lose your home when your spouse dies or goes to a nursing home. When your house eventually is sold, Medicaid will recover the sale proceeds–even if it has to wait until after you’ve died to do so.

The solution? Clearly, Medicaid will pay only if you have few assets. Logically, then, make sure you don’t have assets. Therefore, transfer your assets to your children now. This will make you poor, and by being poor, you’ll qualify for Medicaid. If you don’t transfer your assets to your children, you’ll just spend everything you own on long-term care costs until you have nothing left anyway. Either way, you’ll be broke. So wouldn’t you rather give your assets to your kids instead of to a nursing home?

If you think this sounds reasonable, watch out for some big problems. You’ll find it very hard to give everything you own to your kids just as you’ve reached that time in your life when you can start enjoying yourself. In other words, this recommendation usually doesn’t go over very well.

If you made gifts during the 36 months prior to filing your claim for benefits, Medicaid will deny the claim–60 months for gifts you make to a trust. This rule is specifically intended to prevent people from asset-shifting. And please note an important change in Medicaid rules: If you file a claim at any time during the 36-month waiting period, Medicaid will restart the clock. Therefore if you plan to use this strategy, assets must be transferred well in advance of the need for long-term care, and be sure you don’t file a claim until you’re sure the 36-month waiting period has expired. Also, be aware that transferring assets to a spouse does not shield the assets from Medicaid.