Monday, August 31, 2009

Long-Term Care vs. Medical Costs


Nicholas Kristof relates the story of a friend who divorced her husband in order to avoid having to contribute to his long-term care costs.
If M.’s husband required long-term care, the costs would be catastrophic even for a middle-class family with savings.

Eventually, after the expenses whittled away their combined assets, her husband could go on Medicaid — but by then their children’s nest egg would be gone, along with her 401(k) plan. She would face a bleak retirement with neither her husband nor her savings.

A complicating factor was that this was a second marriage. M.’s first husband had died, leaving an inheritance that he had intended for their children. She and her second husband had a prenuptial agreement, but that would not protect her assets from his medical expenses.
It should be noted that although we treat long-term care costs in many ways as medical costs, they're a somewhat different creature. Absent Medicare or Medicaid coverage, long-term care is generally not covered by even the goldest of gold-plated health insurance. Instead, it's separately insured as (surprise!) "long-term care insurance".

My wife was recently offered the opportunity to buy long-term care coverage as a benefit at work. The price was reasonable, due to her age, but coverage was not available for anybody else in the family. The limits on raising premiums were big enough to drive a truck through - with the cost of insurance also jumping considerably at various age thresholds. It was nice of her employer to make the effort, but it wasn't a good deal for her. As with any choice not to carry insurance, we're playing the odds.

Kristof's friend and her husband made two mistakes, the first of which may have been consistent with the odds at the time the decision was made: they chose not to obtain long-term care insurance, and they chose not to engage in estate planning that would have involved both protecting separate assets and intended inheritances, as well as preparing for possible disability and Medicaid eligibility. Kristof is arguing that, as a rule, society should pick up the cost of long-term care. And that can be part of the current debate - whether long-term care should be included as a basic benefit in health insurance plans. But as it stands, if you don't insure for long-term care, you can expect to pay for a good portion of it - and the trend is for states to be more aggressive in pursuing the assets of people receiving Medicaid benefits, not less so.

But let's not forget, somebody is paying for long-term care. If it's not the recipient of the care, or that person's family, then it's the taxpayer. It's not at all unreasonable as a public policy for the taxpayers to say, "You need to contribute significantly to your own costs of care before we step in." It's possible to increase the exemptions for long-term care, such that the effect on somebody like M. is less pronounced, but why should a taxpayer in effect subsidize her children's inheritance - paying for her husband's care so that her kids can inherit more money?

It should also be remembered that we're talking about more than long-term care for the elderly. We're talking about any recipient of Medicaid or government disability benefits, at any age. There are young people who don't marry because, as one or both of them are disabled, they would have their benefits cut as a result of their combined marital income. There are parents who either don't leave money to disabled children, or who construct special needs trusts that control how the money can be used, in order to keep the inheritance from being taken by the state as reimbursement for the cost of Medicaid. An argument can be made in each of these contexts that the care or benefits should be provided without respect for need, but again there's a countervailing argument that people who can afford to pay for their own care should do so before asking the taxpayer to take over.

The current situation does create absurd outcomes. People do marry in a church but without getting a marriage license, while others live together as spouses, living lives every bit as committed as those in "real" marriage but flying under the government radar. Some, like M., are divorced "in name only", continuing to live with and care for their spouse. But here's something to remember - as long as we impose any income or asset threshold on government benefits, the same "unfairness" will continue to exist. If we raise the threshold we reduce the number of people who are asked to pay for part or all of their own care, or to experience a reduction in their benefits due to their total household income, but we increase the burden on the taxpayer.

If Kristof is trying to make the argument that 100% of long-term care costs should be paid out of tax revenues, it's a perfectly legitimate argument to make - but he doesn't quite come out and say that. I suspect he would concede that some people are wealthy enough that they should pay at least part of that cost. I don't personally see any way to provide universal long-term care insurance, with no means testing, without a significant increase in tax revenues or deficit spending.

If your goal is to stay with the spouse you love, while still protecting your separate assets and preserving inheritances you intended for children from a prior marriage, consult a good estate planning lawyer. (Kristof's tale suggests that when M. married her husband she had considerably more money than him, hence the prenuptial agreement that protects her in divorce but not in his illness. A prenuptial agreement is not an estate plan.)

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