Can Reverse Mortgages Sway Super Committee Negotiations?

A sword of Damocles hangs over the debt-driven “super committee” recently created by the Budget Control Act. Find $1.2 trillion in ten-year savings or else…automatic sequestration will meat-ax the same amount from mandatory and discretionary spending.

[President Obama added another $447 billion to the super committee’s challenge by asking it to pay for his jobs plan announced in last night’s speech to Congress.]

Congressional members and staff should look first to easy savings from Medicaid’s hemorrhaging long-term care program. Here’s how to save tens of billion of dollars while improving the Medicaid program and long-term care services at the same time.

It’s no secret Medicaid is rife with waste, fraud and abuse. But did you know Medicaid’s basic eligibility rules contain perverse incentives that exacerbate all three problems?

Do you think Medicaid requires low income? How naïve. Income almost never disqualifies anyone from qualifying for Medicaid long-term care benefits. Why? Because Medicaid deducts all health and long-term care expenses from income before determining eligibility. You don’t need low income; only a cash-flow problem.

Do you think Medicaid requires that you spend down into poverty? Think again. Medicaid exempts home equity up to $500,000 plus a business, including the capital and cash flow, prepaid burial plans, a car, term life insurance and personal belongings, all without limit.

On top of that, a quick Internet search for “Medicaid planning” will yield thousands of lawyers eager to impoverish you artificially for fees equal roughly to one private-pay month in a nursing home. Come and get ’em: special trusts, transfers, annuities, life care contracts and unlimited exempt assets.

So what? Would changing any of this save significant money? Yes and here’s why.

Relatively few Medicaid recipients account for a plurality of the program’s costs. Dual eligibles who receive both Medicare and Medicaid benefits are only 15% of Medicaid’s recipients, but account for 39% of its costs, 70% of which goes for long-term care.

To save a fortune in Medicaid expenditures, all we need is to divert people who would otherwise end up as dual eligibles away from future public dependency. In fact, to save $30 billion per year, Medicaid would only need to reduce the number of dual eligibles by 1,868,460 or 21%.

Is that feasible? Yes. According to the National Council on the Aging, half of households headed by people over 62 could get over $70,000 each from a reverse mortgage. Imagine if they used that wealth to pay privately for long-term care. Far fewer would ever need Medicaid.

So, why don’t people pay for their own long-term care with reverse mortgages already? Simple. Medicaid exempts their home and all contiguous property up to a minimum of $500,000 and $750,000 in California, New York and other spendthrift states. Why use home equity when Medicaid will pay and protect the home?

What’s to be done?

Eliminate Medicaid’s home equity exemption. Replace it with a requirement to use home equity for long-term care before qualifying for Medicaid. Extend the asset transfer look back period on real property from five to ten years so people can’t get rid of home equity without a Medicaid eligibility penalty.

Too politically sensitive? Hardly. Reverse mortgages allow people to remain in their homes without monthly payments until they move out, sell or die. Most Americans would rather age in place in their own homes than go straight to a nursing home on Medicaid.

Too draconian? Hardly. The home equity exemption in England, where socialized medicine is supposedly “free,” is only $38,000. Why are we more generous with our scarce welfare dollars than the Brits?

Besides, why should a welfare program like Medicaid provide free inheritance insurance to baby boomer heirs? No wonder people don’t worry about long-term care until it’s too late for anything but Medicaid to pay.

Much more needs to be done to close Medicaid’s egregious eligibility loopholes, target the program’s diminishing resources to people most in need, and incentivize the public to save, invest or insure for long-term care so they don’t end up on public welfare in the future.

But tapping home equity to purchase quality long-term care for our elders and to save Medicaid billions of dollars is a great place to start.

Stephen A. Moses is president of the Center for Long-Term Care Reform in Seattle, Washington. He’s currently working with the Cato Institute on a study of Medicaid and long-term care financing.

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