© 1998, Peter James Lingane

Summary. The cost of long term care is about $30,000 a year, net of tax benefits and some reduction in the living expenses of the family unit. Medicaid is not a viable option for those with substantial assets; you need either to buy insurance or to self insure and you need to make this decision while you are still healthy. The cost of insurance seems high, relative to the risk exposure, especially for a husband with a younger, healthy wife. Such a couple might consider the purchase of long term care insurance for the wife but self insure for the husband. This article was prepared in 1996 and may be dated.

Based on an unscientific survey of East Bay San Francisco facilities (endnotes ref. 1) in October 1996, residential care costs about $3000 per month. Residential care is appropriate for patients in the middle stages of Alzheimer's who are not bed-ridden. Some facilities cater to Alzheimer's patients.

The same survey suggests that unskilled help with bathing and other activities of daily living costs about $20 per hour or $5000 per month for live-in assistance.

Skilled nursing care costs about $4000 per month. Some skilled care facilities are Medi-Cal certified. Residential and home care are not available to Medi-Cal clients.

It is appropriate to review the living arrangements of the healthy spouse when long term care becomes necessary. The second automobile and the country club membership may be unnecessary and it may make sense to move residence. Any reduction in living expenses offsets some of the cost of long term care.

Since the cost of long term care may be partially tax deductible (ref. 2), there may be a further offset in cost due to lower income taxes.

Considering both of these factors, the effective cost of long term care might be about $2,500 per month ($30,000 annually) for a couple with $20,000 Social Security plus $60,000 other income (ref. 3).

The statistics on long term care are uncertain (ref. 4). More than half of the nursing home patients stay less than 90 days and only about a quarter stay longer than a year. Conventional wisdom suggests that people in their sixties run about a two in five chance of needing nursing home care. Based on these limited statistics, there is a 10% chance that an individual will require long term care.

Men are under-represented in nursing homes. Those most at risk are single women and widows who are without family or other support group. There might be a 15% chance that a woman would need long term care while her husband's risk factor might be only 5%.

The average stay in long term care is about three years or $70,000 (ref. 5). If there is a 15% chance of needing long term care for one spouse and a 5% chance of needing long term care for the other spouse, the present value of the couple's risk adjusted exposure is about $14,000 (15% times $70,000 plus 5% times $70,000.)

Insurance allows us to share risks among a larger group, effectively converting the risk of a large expenditure to a certain but smaller cost of premiums. In a good policy, the profit margin is modest and the present cost of the premiums is not much larger than the risk adjusted exposure.

The average annual premium for comprehensive long term care insurance, with inflation protection, is about $2000 for someone in their sixties (ref. 6). This is the after tax cost for most people. A couple could prepay the insurance premiums for both spouses by purchasing a $39,000 annuity (ref. 7).

Since the $39,000 present cost for a couple is a lot larger than their $14,000 risk adjusted exposure, a long term care policy seems expensive.

What about taking your chances without insurance? Won't MediCARE pay the big bills anyway?

Medicare will pay for short term, skilled nursing care as one completes their recovery following a hospital stay. Medicare is not a big factor in long term care. Medicare does not cover home care beyond a few hours a week and does not cover residential care.

So, someone with significant assets needs to purchase long term care insurance or to self insure by earmarking $70,000 per person for long term care, should it be needed. The decision comes down to whether a couple wants to spend $39,000 to guarantee that they would be able to pass $140,000 along to their heirs.

(Earmarking a $140,000 Roth IRA for long term care might achieve excellent results since this asset grows tax exempt.)

A middle course might be to purchase long term care insurance for one spouse and to self insure for this other. This works to your advantage because the underwriting of long term care insurance does not generally distinguish between men and women and, as discussed above, it is less likely husbands will require long term care.

Medicaid (or Medi-Cal in California) is the federally and state funded long term care payer of last resort. One becomes eligible when assets have dwindled to one's home, automobile, personal jewelry and a nominal bank balance. It is a bit odd that the federal government pays for the treatment of diabetes for all older Americans but only pays for the treatment of Alzheimer's for poorer Americans.

Should you give away your assets so as to qualify for Medicaid? Probably not for a variety of reasons. First, fewer choices are available to those whose care is paid for by Medicaid. For example, Medicaid does not provide home care but some private plans do.

Second, nursing homes may meet the minimum standard for competent care but differ in quality. One may have appealing food, park-like surroundings, and patients encouraged to furnish their rooms with personal effects. The other may have busy corridors and windows overlooking a parking lot. I'll bet the first home does not accept Medicaid!

The Medicaid rules on financial eligibility are an additional consideration. Essentially all assets of the ill spouse must be used to pay nursing home costs. The healthy spouse is entitled to an income of up to about $2,000 per month and can keep half the community assets up to about $80,000 in addition to a home (ref. 8), automobile and personal jewelry. These limits are known as the "monthly maintenance needs allowance" and the "community spouse resource allowance". The dollar amounts are for 1998 and are adjusted periodically. All other income and all other assets must be used to pay for the care of the ill spouse.

These rules would require quite a change for those in comfortable circumstances!

If you were to give away your assets, the rules require that you live in straightened circumstances for at least three years before becoming eligible for Medicaid.

You might incur a tax bill if you give away your assets, a tax you might be able to avoid with careful estate planning. The gift tax, which equals about half the assets over $625,000, could exceed the premiums on a long term care policy, or even the cost of the care itself.

Finally, there are philosophical issues. Many of us pride ourselves on the fact that we "have always paid our way." Would we take a similar pride in giving away assets to become eligible for a program designed to aid the less fortunate? If we gift assets to our children, how might their new found wealth affect our relationship?

For more complete information on Medicaid, read The Medicaid Planning Handbook by Alexander Bove - be sure to get the most recent revision. Also check the Kansas Elder Law Network and the SeniorLaw sites.

Congress has tried to keep individuals and their advisers from lawfully disposing of assets in order for the individual to become eligible for Medicaid. In March 1998, the Attorney General of the United States announced that the Department of Justice will not enforce this statute because of doubts as to its constitutionality.

Most people asking this question are in good heath and may never need long term care. Might it be better to delay until the need for long term care is more evident?

When you pay for something in advance, whether it be an airplane ticket or long term care, you expect to pay a lower price because the seller earns a return on your money in the interval before the product is delivered. So, you may be better off paying in advance if you don't expect your investments to do better than theafter tax return that the insurance premium credits you with.

Paying in advance also locks in the price and protects against future increases. Reports are that the cost of newly issued long term care insurance is increasing as companies scramble to respond to higher than anticipated cost of care.

The most important reason to pay in advance is that your good health qualifies you for a favorable premium. Later, if your health has deteriorated, there will be a substantial surcharge and you may be unable to purchase insurance at any price.

FURTHER INFORMATION

• "How Will You Pay for Your Old Age?" Consumer Reports, October 1997.
• "Long Term Care Planning: A Dollar & Sense Guide," (1998 Edition, 100 pp.) $18 from United Seniors Health Cooperative, 800.637.2604. USHC is a non-profit organization committed to "the belief that informed consumers are those best able to help themselves."
• "Guide to Long Term Health Care," Health Insurance Association of America, 202.824.1600. HIAA is a trade association of health insurers and managed care companies.
• "A Shopper's Guide to Long Term Care Insurance," free from the National Association of Insurance Commissioners, 816.374.7259.
• Eldercare Locator, a service of the U.S. government, puts callers in touch with state and area agencies, tribal organizations and private organizations serving the elderly. 800.677.1116, 9 am to 11 pm EST, M-F.
• The Clinical Tools site provides references to a variety of health care information resources.
• The Mr. Long Term Care offers a variety of information links.
• This site offers information about insurance companies licensed to sell long term care policies in California.

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