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Pretend Paupers
Keywords: "Medicaid," "asset transfers," "middle class." The computer's browser races towards the edge of the info universe, looking for matches.
Hyperlink to http://www.senior.com/estate.html. Up pops the World Wide Web site run by D. Victor Pellegrino, Esq., a New York "elder law" attorney. Pellegrino helpfully posts a file of ten frequently asked questions about how middle-class people can qualify for Medicaid and then invites readers to e-mail him "to explore this area in greater detail." Now we're closing in.
A little ways down the infobahn, an enterprise calling itself "Entitlement Management, LLC" (EM) has hung a shingle. "Hello Visitors!" the good folks at EM exclaim. "We decided to become a presence on the World Wide Web in order to assist people to:
* Protect their hard-earned assets;
* Successfully apply for social security disability;
* Successfully apply for medicaid.
Just to make sure I understand what is actually being advertised here, I dash off an e-mail letter asking if it is "really necessary for a person to spend down all his assets to qualify for Medicaid." A short time later comes e-mail from Eileen McMullin, senior partner at EM. "No, a person does not have to spend down/reduce," she responds. "There are a number of ways to transfer assets to children and still qualify. Your questions indicate that I can most likely help you. I will be glad to discuss fees with you once I know what your exact needs are."
Welcome to one of the most egregiously unfair causes of Florida's, and the nation's, worsening fiscal crisis: the takeover of Medicaid by the middle class and wealthy. Financed jointly by the states and the federal government, Medicaid was established in 1965 to pay for the medical needs of the indigent poor, including long-term nursing-home care. But today, the program is rapidly gentrifying, as middle-class and well-to-do families learn how to rearrange assets to get around Medicaid's strict means test.
U.S. Sen. Bob Graham has characterized Florida's Medicaid as "the great white shark that threatens to gobble up Florida's budget for schools and everything else." But it isn't just the money Medicaid distributes to the poor that's driving the cost of this program. This fiscal year, Medicaid will pay more than $1.4 billion in nursing-home benefits to over 47,000 beneficiaries in Florida. And among these beneficiaries, 30% to 35% have not actually spent down their assets, according to the best guess of Bentley Lipscomb, secretary of Florida's Department of Elder Affairs. If Lipscomb is correct, then non-poor Medicaid beneficiaries are consuming nearly as much as the entire Florida Medicaid nursing program cost just eight years ago.
No one knows the exact distribution of wealth among the Medicaid beneficiaries because many of the techniques used to disguise the assets of people applying for the program do not create any paper trail in the public record. But the sums involved are substantial. Middle-class and affluent families who figure out how to get Medicaid to pay for Grandma's nursing-home needs receive an annual subsidy averaging $30,500 - roughly equivalent to the price of a brand-new, well-equipped Lexus ES-300 - money that comes out of the same budget that is supposed to meet the health-care needs of the truly needy.
The gentrification of Medicaid has been going on in earnest since at least the early 1990s, but the trend has suddenly assumed a new urgency; indeed, it is threatening to become literally a matter of life and death. As of this writing, Congress is debating cuts in Medicaid that could cost Florida as much as $8 billion over the next seven years. Though Clinton and the Democrats in Congress are likely to succeed in reducing the magnitude of that cut somewhat, "the one sure thing we know is that cuts will happen," says Charles Salem, a government analyst in the State of Florida's Washington Office.
With federal support for Medicaid inevitably on the wane, the competition for the program's remaining resources will become acute - leaving poor sick children (the politically weakest group collecting Medicaid) particularly vulnerable to state budget cuts. This is especially true in Florida, where a large elderly population puts particular pressure on Medicaid spending for the non-elderly. "What you are going to see are dead babies," predicts Dee Jeffers, director of the Healthy Start Development Program at the University of South Florida.
Financially needy seniors and their families are also victimized when limited resources wind up being consumed by the non-needy. In the coming months, Floridians will be forced to engage in a far-ranging debate over the future of Medicaid. An appropriate place to begin is with a hard look at how so many middle-class and more affluent families have managed to place themselves, or their parents, on the Medicaid roles.
Lawyers and Loopholes
There is no question that more and more families find themselves threatened these days by catastrophic long-term nursing-home costs. Medical science has dramatically reduced the risk of dying from such acute illnesses as whooping cough or diphtheria, or even heart attack, but the price of expanding longevity is a heightened risk of developing chronic, long-term disabilities, such as Alzheimer's disease. Among the population currently age 65 or older, almost half will spend time in a nursing home, most often for between one and five years. In Florida, the cost of such care averages $36,000 a year.
Yet only 4% of seniors have purchased private long-term care insurance, despite its now being widely available. Why?
One reason, of course, is simply denial. Who wants to dwell on the prospects of developing Alzheimer's or becoming incontinent, no matter how common such conditions? Another reason is that many Americans erroneously believe that Medicare will cover their chronic long-term care needs. But a final, and increasingly important, reason is that more and more middle-class and wealthy seniors and their children are learning how to get Medicaid to pay for their nursing-home bills and still preserve their assets.
"If people feel that all they have to do is get a lawyer and pay a couple of thousand dollars in order to get on to Medicaid, the private long-term care insurance industry can never compete," notes Erwin Bodo, director of reimbursement and statistical programs for the Florida Health Care Association, which represents the state's for-profit and not-for-profit nursing homes. Tellingly, Bodo, who is 47, has not purchased private long-term care insurance for himself. Nor, with a single exception, have any of his colleagues at work, despite being exposed daily to the realities of chronic disability. Even those who criticize Medicaid's de facto transformation into a middle-class welfare program act on the assumption that one way or another, the government will pay for their own nursing-home care, too.
By taking advantage of numerous loopholes, it's easy for middle- class and wealthy people to qualify for Medicaid. "I have numerous clients that I have sheltered hundreds of thousands of dollars for," boasts Julie Osterhout, an elder-law attorney practicing in Fort Myers.
Stories about spouses having to impoverish themselves in order to qualify an ailing partner for Medicaid are still commonly heard, but the reality has been quite different for many years now. For example, under a federal law passed in 1988, a healthy spouse can retain not only a homestead of unlimited value, but also financial assets of up to $74,820. Income tests for Medicaid eligibility aren't difficult to pass. In Florida, a sick spouse with up to $1,374 in monthly income can qualify for Medicaid-funded nursing-home care; of that income, his or her healthy spouse can keep up to $1,254 without sharing some of the nursing-home expense.
Even these comparatively mild restrictions are easily avoided.
To begin with, anyone, regardless of wealth, can qualify for Medicaid nursing-home benefits simply by transferring assets to children or other beneficiaries at least 36 months before applying for assistance. If this time restriction proves too cumbersome, it is also easy to get around. For example, one can pay down a mortgage, put in a new pool or addition, or buy a bigger, more expensive house. These are commonly used ways to shelter assets because homestead property is not counted as wealth by Medicaid's means test.
The state says it tries to prevent obvious cases of abuse, such as non-motorists trying to exclude automobiles as a personal asset in the Medicaid eligibility test. Yet in reality, Florida law allows some individuals to qualify for Medicaid by transferring assets in the form of big-ticket gifts to friends and relatives.
This means, for example, that you can get Grandma to buy a Mercedes for you, a Lexus for your brother, a Cadillac for your sister and still have Medicaid pick up her nursing-home bills.
Moreover, virtually unlimited amounts of assets can be sheltered in Medicaid's means test through the purchase of annuities. "Under the current rules, annuities count as income, not assets," explains attorney Osterhout. "So that way you can shelter $200,000 in just five minutes." Larger sums can be sheltered through the creation of Charitable Remainder Trusts and other sophisticated devices.
Osterhout belongs to a burgeoning cadre of elder-law lawyers in Florida who make a substantial living by counseling middle- and upper-income families on how to take advantage of such loopholes. One measure of the growth of this kind of practice is the membership of the Florida Bar's Elder Law section, which has gone from zero at its founding in 1991 to nearly 1,200 members today. The National Academy of Elder Law Attorneys, a group particularly focused on the ins and outs of eligibility law, has 213 members practicing in Florida, including its president-elect, Ira Wiesner of Sarasota.
Rationalizing Irresponsibility
Many public officials are outraged by the emergence of the so-called elder-law bar. Notes Lt. Gov. Buddy MacKay: "I was doing estate planning when I was practicing law, and some of my clients would ask me to do this sort of thing. But I always declined because I think it's unethical. I don't approve of the attorneys in this state who think it's just clean fun to help people shelter assets to qualify for Medicaid."
The same sentiment is echoed by Doug Cook, director of Florida's Agency for Health Care Administration, which oversees the state's Medicaid program: "We now have a cottage industry in this state of attorneys who encourage their clients to avoid their responsibility."
Predictably, elder-law attorneys don't see themselves in the same harsh light. First, they insist what they do is perfectly legal. Sheltering assets to meet Medicaid's means test, they say, is no different than claiming the home mortgage deduction or taking advantage of some other legal loophole when you do your taxes: Under current law, this is something middle-class and wealthy people are entitled to do even if it adds to the deficits and leads to cuts in other programs.
Moreover, many elder-law attorneys argue, it is sound public policy to allow the middle class on to the Medicaid rolls. For example, in his book, "How to Protect Your Life Savings From Catastrophic Illness and Nursing Homes," Harley Gordon, a founding member of the National Academy of Elder Law Attorneys, argues: "True, Medicaid was designed to provide for the poor who have no other means to pay for long-term care. But that's the point - there is no system for the middle class. Does that mean that it makes sense to drive millions of elderly Americans into poverty before we lend them a hand?"
Some elder-law attorneys also evoke a kind of moral relativism in justifying their work. Why is it, they ask, that middle-class people who use Medicare to pay for acute illnesses face no opprobrium, but those who use Medicaid to cover the cost of chronic illness are condemned as unethical? If it's O.K. to have the government pay for your heart attack, they ask, why is it not O.K. for the government to pay for having your bed pans changed? "Find the high moral ground anywhere," says Charles F. Robinson, one of the state's most prominent elder-law attorneys. "Nobody can climb mountains and raise flags on this issue."
Since more and more middle-class families are becoming convinced that they are indeed entitled to have the government pay for their nursing-home needs, it's worth examining these claims. True enough, the current law of the land does allow middle-class people - and even millionaires - to take advantage of many loopholes in qualifying for Medicaid. So long as this is true, individuals can hardly be faulted for legally pursuing their economic interests. But is the law that allows middle-class and affluent families with clever lawyers to qualify for Medicaid itself really fair or in the public's long-term interest? Why haven't our political leaders closed these loopholes long ago?
Out of the Mouths of Babes
Note, to begin with, how this policy serves to redistribute resources. Middle-class and wealthy families on Medicaid have not paid for the benefits they receive. The program is funded on a pay-as-you-go basis by general revenues coming from both the state and federal governments. So when the Smith family, say, gets Grandma on Medicaid, and thereby preserves her savings, that's not just the Smith's private business. As soon as she goes on Medicaid, you and all other taxpayers wind up subsidizing not only Grandma herself, but also her heirs through the extra inheritance she's thereby able to bequeath.
And taxpayers aren't the only losers. Families trying to pay for their own nursing-home care take an additional hit. Explains Mary Ellen Early, director of public policy for the Florida Association of Homes for the Aging: "If Mrs. X deliberately spends down her assets to qualify for Medicaid, that means everyone else who's paying with their own money must pay more." Florida nursing homes, says Early, lose $240-$300 a month on each Medicaid patient, so that cost is shifted to private-pay people.
Is there really no moral difference, as attorney Robinson claims, between the middle class' entitlement to Medicare, and its (de facto) entitlement to Medicaid? At least by design, Medicare is a social insurance program under which beneficiaries help pay for the cost of their own benefits through payroll taxes collected during their working years, as well as through premiums, co-payments and deductibles collected during their retirement years. True, the federal government has so mismanaged the program that the average Medicare recipient receives many times more in benefits than he or she ever paid in taxes. True, as it careens towards insolvency as a result, Medicare has degenerated into something approximating a straightforward transfer of wealth from young to old. But the fact that politicians over the years have used Medicare as a means of buying votes with windfall benefits is hardly an argument for why some middle-class and wealthy Americans should now receive windfall Medicaid benefits as well.
Generational equity is another reason Medicaid shouldn't be a middle-class and wealthy entitlement. America, as we all know, is aging. This means that benefit programs that may be affordable today won't be in the near future if they distribute on the basis of age, or medical need, alone. In Florida, the population of frail elderly persons requiring long-term care is expected to grow from 281,000 today to 359,000 in 2005 and 401,000 in 2010, according to preliminary estimates by the Florida Policy Exchange Center on Aging at the University of South Florida in Tampa. The Florida Legislature's Joint Legislative Management Committee projects that, unless the program is dramatically reformed, Medicaid nursing-home costs will double in the next six years and reach well over $4.7 billion by 2004.
That is half a billion dollars more than Florida spent over the entire decade of the 1980s on Medicaid nursing-home benefits.
Much of this burden is unavoidable - the result simply of the aging of the population. But the public expense deriving from middle-class and affluent families who have simply neglected to insure themselves against long-term care costs is avoidable and indeed must be prevented if Florida is to avoid a fiscal meltdown early in the next century.
With the public in no mood to pay ever-higher taxes, the ever-rising cost of Medicaid will also likely lead to severe reductions in programs benefiting children - including education. Children's advocates and advocates for the elderly often talk as if they were all members of one big happy family, but those who have observed the budget process closely know that's wishful thinking at best. "Even when people say that philosophically they don't want to compete, in reality they do," says Ed Feaver, secretary of Florida's social welfare agency, Health and Rehabilitative Services.
Again, the aging of the population makes much of this competition between the generations inevitable, but for precisely that reason Florida can't afford to make a bad situation worse by allowing more and more non-needy persons on to the Medicaid roles. Already, more than 30% of the money distributed by Florida's Medicaid program goes to persons age 66 or older. Only 3% of Florida Medicaid's caseload resides in nursing homes, but this population collects 24% of the program's resources just for the cost of their nursing-home beds alone. Meanwhile, the threshold for children receiving Medicaid is as low as 31% of the government's own official poverty line. The state's day-care program for the working poor has a waiting list of 25,000 and its Child Abuse and Neglect Prevention program has a waiting list of 2,100.
As the numbers of Floridians requiring long-term care continue to grow dramatically, the cost of a Medicaid program that pays out benefits to the poor and non-poor alike could easily crowd out virtually all other social spending, particularly for groups that are not politically powerful. "The people without lobbyists will be left out," says Robert Sharpe, bureau chief of Medicaid Program Development at the Agency for Health Care Administration. "That means poor women and children."
A Pay-After-You-Go Plan
So what is the solution? The federal government could create a social insurance program like Medicare that covered long-term care, but frankly, its record in managing Medicare, Social Security and other social insurance programs does not inspire confidence. Any taxes collected for the purpose of pre-funding future long-term care costs would likely wind up going to defray the current cost of government, as has happened with all the so-called assets of the Medicare and Social Security trust funds.
The only real solution is for middle-class and wealthy people to take responsibility for their own future long-term care needs by purchasing private long-term care insurance. And the only way this will ever happen on a sufficiently large scale is if government sends a very clear signal that Medicaid will not pick up your nursing-home bills unless you are truly needy.
This could be done without imposing undue hardships on Medicaid beneficiaries. For example, the state could implement a kind of "pay-after-you-go" plan. Medicaid beneficiaries could continue to hold on to the types of assets that are currently exempt from Medicaid's means test, such as homestead property and annuities.
In fact, spend-down requirements for currently non-exempt assets such as bank accounts could be greatly liberalized. But the state would place liens on these assets which it would exercise after the beneficiaries' death to recover the value of their Medicaid benefits. In this way, Medicaid nursing-home benefits would essentially become loans, not grants. Medicaid patients could have the psychic satisfaction of not having to spend down their assets during their waning years, but the taxpayers would not be responsible for indemnifying their heirs.
Florida already has a modest asset recovery in place, but for the most part it is concerned with recovering unreported windfalls received by Medicaid beneficiaries such as inheritances from siblings. The real challenge is to close the legal loopholes in Medicaid eligibility rules and then make sure the new law is enforced.
The refusal of Florida and other states to do this angers many Medicaid experts. Stephen A. Moses, director of research at LTC Inc. in Seattle, and author of a 1994 study on Medicaid asset transfers in Florida commissioned by the Agency for Health Care Administration, slams Florida officials for not having the courage to stand up to the elder-law bar and its clients. "I think they've been extremely irresponsible," says Moses. "They are still caught in the old way of doing things. Why take welfare money and keep giving it to wealthy people?" If, as now seems likely, Congress devolves full responsibility to the states for setting Medicaid eligibility rules, Florida will have a free hand in closing all the loopholes in current Medicaid law.
How much money would a "pay-after-you-go" plan for Medicaid save? No one knows for sure, but to the extent that such a policy encourages the middle class and wealthy to purchase private long-term care insurance rather than relying on government, the savings could be substantial, especially over time. State government could further discourage middle-class and wealthy dependence on Medicaid by mandating long-term care riders on private and public employee group health policies. This way, today's workers would begin to pre-pay their generation's huge future liability for long-term care. As even many elder-law attorney's themselves admit, the middle class cannot count on the government's continuing ability to deliver long-term care as an entitlement; in the end, the middle class and the wealthy must pay their own way.
