I've got some good news and I’ve got some bad news. The bad news first: The federal government and members of Congress control our industry’s fate. Now the good news: For the first time ever, the reverse mortgage industry has the opportunity to craft a simple and clear message that resonates in the current Washington, D.C. environment. That message is that reverse mortgages save Medicaid dollars. Additionally, we know we have the facts to prove it. But first, let's appreciate the problem our country is in. As you grasp its magnitude, you’ll also see the opportunity; the reverse mortgage industry is now a part of the “solution” to our country's fiscal problems.
Our country has a serious problem The central focus in Washington, D.C. today (and for the near future) is fiscal responsibility and reducing government spending. Here's why: Our country is at a financial tipping point. Most economists agree that a nation is in trouble when its formal debt exceeds its annual output of goods and services (GDP). This is not an arbitrary measure. When a nation has debt equal to its annual output, the annual cost of interest on the debt is likely to be greater than the annual growth of the economy. To illustrate this, the interest rate on the national debt approximates 4 percent. If the economy is not growing by a similar amount, a country can slide toward a hopeless debt spiral. This is what is happening in the United States today. Our formal debt is $14.1 trillion and our gross domestic product for 2011 is estimated at $14.7 trillion—about the same. We are already at the flashpoint. The United States economy certainly isn't growing at a rate close to the interest rate on the national debt. Accordingly, the country is at a tipping point.
And if that news wasn’t bad enough, consider this, as mentioned above, the United States’ formal debt is $14.1 trillion, but that does not include our informal debts. What are informal debts? They are promises of future benefits—payments—embedded in the entitlement programs like Social Security, Medicare and Medicaid. They may not be treasury bonds, but most of us regard these programs as very strong promises. Citizens riot when governments default, renege or even fiddle with promises like these and unfortunately these unfunded liabilities are gigantic. For Social Security, Medicare and Medicaid, the unfunded liability exceeds $70 trillion. Add that to the $14.1 trillion formal debt and now you get a real sense of the dire economic reality the United States faces in 2011.
The primary solution – reign in the entitlements In the United States, the three major entitlement programs (Social Security, Medicare and Medicaid) account for approximately 58 percent of the annual budget. Other than national defense, these entitlements dwarf the other components of the budget. Accordingly, the solution to the national debt problem of the United States noted above can only be found in scaling back and finding savings in those big three entitlements. Again, the math doesn't lie; this is the only path to get the national debt under control and restore fiscal responsibility to our government's finances.
Medicaid: the problem and the reverse mortgage industry’s opportunity Medicaid currently covers 53 million people at an annual cost of $373.9 billion with the states responsible for about half of it. Starting in 2014, the Obama Care rules will add about 20 million people to Medicaid all at one time according to Medicaid's chief actuary, Richard Foster. This is a 39 percent increase from the existing 53 million people already covered.
The biggest expense of Medicaid is for long-term care primarily for the elderly. We spend $98 billion a year on this, with the majority spent on nursing home care. It's a staggering number. Further, it's been well documented that when people are institutionalized and put in a nursing home, they are often over treated, overmedicated and Medicaid dollars are wasted. Few would challenge the claim that the Medicaid program is poorly run, inefficient and is a huge obstacle in getting this nation’s spending problem under control. But, this Medicaid problem is only growing as the baby boomer generation evolves into old age.
The most serious problem with regards to Medicaid is the eligibility side of the equation. Medicaid eligibility rules are very loose and that's the fundamental problem. Today, there is a thriving industry within the legal community that helps people shift their assets so they can qualify for Medicaid and have their long-term care paid by the government rather than themselves. To make matters worse, Medicaid has codified into law the planning techniques allowing this. It is for this reason that, to a large extent, Medicaid has evolved from its intended purpose of being the provider of quality long-term care for the genuinely needy into the role it actually plays today: protecting people's inheritances. This role is contributing to the bankruptcy the United States faces.
The most glaring problem in the Medicaid eligibility rules is that Medicaid allows a person to exclude their personal residence, regardless of value, from the means test to determine if he or she qualifies for Medicaid. The effect of this is that there is no incentive for people to take responsibility for paying for their own long-term care with their biggest asset: their home. That's why today Medicaid is the primary payer of nursing home care in the United States instead of individuals taking financial responsibility for their own long-term care.
Our industry has a unique opportunity regarding our value proposition In the past, the reverse mortgage industry has not had a clear and articulate message that resonates with the entity that controls our destiny (Congress). Now we do! The changes that we have seen in this country that began in November 2010 with the midterm elections create a new opportunity for our industry in the coming years. Fiscal responsibility has clearly become the dominant theme for the next five years; it will be the central topic of discussion in 2012 because of the presidential campaign. This all plays well for the reverse mortgage industry. By promoting the value proposition that reverse mortgages save Medicaid dollars, we become part of the solution. And as they say, if you're not part of the solution, you're part of the problem. Our industry has never had a better opportunity than we have today; in the next few years we can craft a message that resonates and ensures our industry’s long-term viability.
Our message to Washington, D.C. should be: Reverse mortgages save Medicaid $3.3 billion to $5 billion a year Increased use of reverse mortgages for long-term care could result in savings for Medicaid, ranging from about $3.3 billion to almost $5 billion annually, depending on the future market penetration of reverse mortgages from its current 2-3 percent. These savings result from the additional cash available to borrowers that would delay or eliminate the need for Medicaid.
One of the keys to increasing the use of reverse mortgages in the future is to eliminate the home exemption rule for Medicaid eligibility. This is definitely going to happen as the hemorrhaging Medicaid program is fixed, irrespective of whether or not we, as an industry, support this or not.
As previously noted, under the Medicaid rules today, a person can qualify for Medicaid but still have had a home of unlimited value. Changing this will increase the use of reverse mortgages and will fundamentally shift the responsibility for the future long-term care of seniors off the government’s shoulders and back onto the shoulders of the individuals.
Support for this position: A new industry study In the first quarter of 2011, I created a 59-page study to support the contention that reverse mortgages save Medicaid dollars. I did this study because I felt like the “value proposition” for our industry with regards to the federal government had to be that reverse mortgages save Medicaid dollars. To me, this was the obvious message in the evolving Washington, D.C. environment of fiscal responsibility. It was also clear to me that this was going to be the priority in Washington, D.C. for the next five years. In light of this undeniable fact, we needed some support for this concept. The heavy lifting for my study was really done by Barbara Stucki, Ph.D with the National Council on Aging. Her landmark study, “Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages for Long-Term Care” was done a few years ago and really fleshed out in detail the size of the Medicaid savings. Her study was the foundational part of my study and our industry owes a debt of gratitude to her. I took the great work she did and updated it with what is happening today and where the country is headed in the future.
My study, “Medicaid Cost Solutions 2011 and 2012 … Reverse Mortgages” was released April 2011, but that only started the conversation. Now a new version of my study is coming out in July 2011. The 2.0 version will include the input and wisdom of the top 10 leaders in the reverse mortgage industry. Each has been distributed a copy of the study and each has a unique perspective that can improve the study. The goal of coming out with a 2.0 version is to evolve a study done by one person into a one that the entire industry can get behind and support because it incorporates the thoughts and ideas of the top 10 movers and shakers in the reverse mortgage industry.
So how's this message likely to be received in Washington, D.C.? I've seen the future. In early April, as one of the board members of CIS, I accompanied other board members to Washington, D.C. to meet directly with Congressmen and Senators. Our agenda was to present the message that reverse mortgages save Medicaid dollars directly to Congressmen, Senators and their staff. From doing this, I saw the effect firsthand; it was very encouraging. The message that reverse mortgages could play a vital role in reforming Medicaid along the path of greater fiscal responsibility for the country lit up people’s eyes. For most, it was a refreshing change to meet with someone that had a solution rather than asking for something and being part of the problem. More often than not, we heard “this is something new we hadn't heard of before.” The message was very well received.
The other thing that we discovered is how valuable letters to Congressmen and Senators are today. Each Congressman and Senator takes the letters they receive and puts them in categories. Senator Kay Bailey Hutchison from Texas, told us about the positive effect of the letters she received last year in the third quarter had on her. It caused her to learn more about reverse mortgages and appreciate the positive benefits. This happened because my company, Reverse Mortgage USA, made a concerted effort to get our past clients in Texas to write Senator Hutchison in 2010. While this was good for the Senators, our eyes were also opened to a significant problem. Most Senators, Congressmen and their staff don't really know what a reverse mortgage is, they don't understand our value proposition, and because people haven't been writing to them about reverse mortgages, it’s not on their radar. Clearly we have to change this if we are going to protect our industry for the long-term by getting Congressional support.
A radical solution with regards to the media that distorts reverse mortgages As an industry, we are not going to change the sound bite driven media. We will never win that battle. But there is a way to win the war. As an alternative to thinking we can win over the media, let's create security for our industry by having the presence of mind to have a simple and clear message that resonates with Washington, D.C.: simply that reverse mortgages save Medicaid dollars. Then, with that simple and clear message that is driven home every chance we get, as an industry, let’s develop a long-term, month-in-and-month-out letter writing campaign directed to members of Congress. Today more than ever, members of Congress are listening to their constituency. The take away is that we need to have an aggressive letter writing campaign on an ongoing basis that influences our benefactors in Congress. I intend to spearhead that initiative in the second half of 2011 on behalf of the industry with the help of many of my competitors.
Summary Can you connect the dots? First, the United States is at a financial tipping point. We have a $14 trillion annual economy and a $14 trillion national debt. Additionally, we have a $70 trillion plus unfunded liability from the entitlements: Social Security, Medicare and Medicaid. The growth rate of the economy over the next few years is projected to be at about half the interest rate on the national debt.
Accordingly, we are starting a downward spiral, which will pick up momentum with each coming year as the entitlements’ unfunded liabilities come even more into play with the increased aging of the overall population.
There is an available solution to the financial situation our country is in that will save $3.3 billion to $5 billion annually in Medicaid expenses; that solution is reverse mortgages. The beauty of the reverse mortgage Medicaid savings proposition is that it is easy to understand. If people are incentivized and encouraged to take out a reverse mortgage to pay for their future medical needs, fewer people will go on Medicaid and be a burden on the US government and its taxpayers. Not hard to understand, is it? It's this simplicity that provides so much strength and staying power to our message, and that's what we need to promote. Let’s get behind a clear message that resonates, coupled with an ongoing letter writing campaign that influences the people that directly control our industry’s destiny.