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Life Health > Life Insurance > Term Insurance

5 reasons Medicaid kills long-term care insurance sales

By Allison Bell

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You know that competition from the Medicaid nursing home benefit makes selling private long-term care insurance hard.

So, what does that cash-strapped, bureaucracy-plagued program have that private LTCI never really had, even back when interest rates were high enough that insurers felt comfortable with writing private LTCI?

Mariacristina De Nardi and two colleagues have used the tools of economics to wrestle with that question in a new paper on Medicaid insurance in old age. The paper is on track to appear in an upcoming issue of the American Economic Review, a major academic journal.

De Nardi, a senior economist at the Federal Reserve Bank of Chicago, and her colleagues developed a model showing how people’s saving and medical spending affect the amount of help those people get from Medicaid, and how much those people value Medicaid benefits. The researchers then tested their model by comparing their predictions to the figures in actual survey data. The predictions matched the data well enough that the researchers believe their model may tell users something about how consumers really think of Medicaid nursing home benefits and private LTCI.

One lesson from the study is that Federal Reserve Bank economists do follow how older people pay their bills in old age.

These days, the Federal Reserve System seems to act like the archenemy of older people. It’s been holding the interest rates that older people need to earn income on their bonds, and that insurers and pension funds need to earn enough income to meet long-term obligations to retirees, at artificially low levels for years, to help prop up young homeowners, publicly traded corporations, and governments that have accumulated huge mountains of variable-rate debt.

Related: New York Life adds LTCI product

But Fed economists do recognize, at least for academic research purposes, that retiree spending and workers’ efforts to save for retirement play a major role in shaping the economy, and they recognize that long-term care expenses can have a major effect on people’s saving, spending and ability to pass assets on to children through bequests. 

Related: Bernanke: Time to Make Tough Decisions

In the new paper, De Nardi and her colleagues translate long-term care saving, spending and insurance decisions into the kind of mathematical language that economists can handle. Earlier, preliminary versions of the paper have been appearing online for years. The paper has evolved to include much more discussion of the mystery surrounding the lack of a vibrant U.S. private LTCI market. To simplify the analysis, the researchers looked only at the economics of single retirees.

For a look at some highlights from the research, read on.

For retirees with a beer budget, Medicaid may look different than it does to other retirees. (Photo: SeppVei/Wikimedia Commons)

For retirees with a beer budget, Medicaid may look different than it does to other, cash-strapped retirees. (Photo: SeppVei/Wikimedia Commons)

1. Medicaid protects low-income households against everyday long-term care expenses.

De Nardi and her colleagues say their model shows that depending on Medicaid for post-retirement health care costs, including long-term care costs, is popular partly because it suits the needs of low-income people. Low-income people need help with many relatively small health care bills, and Medicaid helps them with those small, frequent bills, the researchers say. 

Related: 5 states where older people get stuck in nursing homes

The researchers say higher-income people use Medicaid differently than lower-income people do. (Image: Thinkstock)

The researchers say higher-income people use Medicaid differently than lower-income people do. (Image: Thinkstock)

2. Medicaid buffers high-income households against catastrophic nursing home care bills.

The researchers say Medicaid is also a great backstop program for high-income people.

The federal-state Long Term Care Partnership program is supposed to encourage relatively high-income people to buy private long-term care insurance by promising the purchasers that they can then qualify for Medicaid nursing home benefits on easier terms if they run out of private LTCI benefits.

But Medicaid already acts like a catastrophic LTCI insurer for high-income people, the researchers say.

The researchers used private and government survey data to break older U.S. people down into income “quintiles,” or groups equal to one-fifth of the population.

Households in the high income quintiles are much less likely to receive Medicaid help than households in the lower quintiles are, “but the transfers that they receive are very big and correspond to severe and expensive medical conditions,” the researchers write. “Medicaid is an effective insurance device for the poorest, but also offers valuable insurance to the rich, by insuring them against catastrophic medical conditions which are the most costly in terms of utility and the most difficult to insure in the private market.” 

Related: 7 (relatively) easy insurer ideas for saving long-term care insurance

The researchers found that the value of Medicaid nursing home benefits appears to be right on target. (Image: Thinkstock)

Researchers found that the value of Medicaid nursing home benefits appears to be right on target. (Image: Thinkstock)

3. The current Medicaid nursing home benefits appear to give typical retirees almost exactly as much actuarial value as they want.

The researchers can use their model to estimate, in economic terms, how much people really think Medicaid protection is worth, even though they don’t have to buy it.

The model shows that the value most retirees place on Medicaid insurance is higher than the actuarial value of the expected Medicaid benefits payments. But, if managers expanded Medicaid and increased taxes to pay for the expansion, the value of the extra coverage would less than the cost for most retirees, the researchers say.

“These comparisons of the [Medicaid benefits payments] actuarial values to their recipients’ valuations suggest that the current Medicaid program for most currently single retirees is about the right size,” the researchers say.

Related: Tim Kaine and Mike Pence should debate long-term care policy

The researchers say one huge barrier to private insurance expansion is what consumers know about their own health. (Photo: Jasmin Awad/Thinkstock)

The researchers say one huge barrier to private insurance expansion is what consumers know about their own health. (Photo: Jasmin Awad/Thinkstock)

4. Medicaid managers soar past the underwriting mysteries faced by issuers of private long-term care insurance.

De Nardi and her colleagues say that the high value retirees place on Medicaid protection in their model makes the small size of the private LTCI market puzzling.

The answer is probably that consumers know so much more about their own health than insurers do that insurers have a hard time creating an efficient private LTCI market, the researchers say. 

The researchers cite other research showing, for example, that 23 percent of 65-year-olds already have health conditions that make buying private LTCI difficult, and that a large percentage of people rejected by LTCI underwriters seem to have even more information about their own poor health than the underwriters who rejected them had.

The other researcher “show that, when private information problems are sufficiently large within certain subgroups, insurance markets fail to emerge,” De Nardi and her colleagues say.

Related: Researcher: LTCI Rejectees Riskier Than They Look

The researchers show Medicaid recipients are about 40 times more likely to have medical costs in the top 1 percent. (Photo: Thinkstock)

The researchers show Medicaid recipients are about 40 times more likely to have medical costs in the top 1 percent. (Photo: Thinkstock)

5. Medicaid ends up paying for care for very poor people with very high medical bills.

Because Medicaid is a government-run, taxpayer-funded program, it may have the flexibility to pay for care for people that private insurers might have trouble covering profitably, according to the researchers’ analysis.

The researchers estimate, for example, that only about 1 in 1,000 of the high-income retirees who will never qualify Medicaid nursing home benefits will rank in the top 1 percent of the retiree population in terms of medical costs.

About 40 in 1,000 of the retirees who qualify for Medicaid will rank in the top 1 percent in terms of medical spending.

“Medicaid recipients are more likely to be sick, and far more likely to be very sick, consistent with Medicaid’s role as the payer of last resort,” the researchers say.

The researchers assume as a given that Medicaid will pay about what it says it will pay.

The researchers note that, in the future, they would like to see what a cut in Medicaid value might do to households’ purchases of private LTCI.

“We argue that there are many reasons to think that introducing LTCI decisions would not significantly affect our results,” the researchers say, but the researchers say they would look to study that issue more formally.

Related:

5 things state lawmakers want to do about long-term care insurance

7 ideas for improving long-term care insurance

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