Tax And Economic Policy Responses To The Medicaid Long-Term Care Financing Crisis: A Behavioral Economics Approach

• Author: Diane Lourdes Dick
• Position: J.D., 2005, University of Florida Levin College of Law
• Pages: 379-423

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J.D., 2005, University of Florida Levin College of Law; M.A. in Political Science, 1999, Florida International University. I owe a debt of gratitude to Patricia Dilley, Jeffrey Harrison, David Richardson and Danaya Wright for their attentive assistance and detailed comments on earlier drafts, and to Suzanne Hutton for mentoring me through complex legal questions in the area of assisted living. I am also grateful for the comments and guidance of Professor Barak Richman of Duke Law School. His recent article Behavioral Economics and Health Policy: Understanding Medicaid`s Failure, 90 CORNELL L. REV. 705 (2005), served as both an inspiration and an example for my work. Perhaps more fundamentally, however, I thank the residents, families, and healthcare professionals I came to know when I worked in long-term care social services prior to law school. Their stories, insights, and thoughtful reflections motivated my research and enabled me to synthesize a wide range of interdisciplinary findings. I dedicate this Article to the memory of Mack Lomrance, whose dignity and grace continue to inspire me.

Introduction

The United States faces an unparalleled healthcare financing crisis.1 In 2006, more than fifty-five million individuals in need of healthcare coverage turned to the federal and state governments for assistance through the Medicaid program.² Among those seeking coverage are low-income pregnant women and families with dependent children; the aged, blind, and disabled; the mentally ill; and acutely or chronically ill persons who lack private insurance coverage.³

Meeting the health insurance needs of these categorically⁴ and medically⁵ needy Americans through a public welfare program is no easy Page 380 task. Healthcare costs steadily rise,⁶ and income tax revenues have only recently begun to recover from the post-September 11 recession.⁷ In 2003, the total federal and state outlay for Medicaid was $273 billion;8 this figure is expected to have exceeded $300 billion in 2006.⁹ On average, Medicaid expenditures already consume approximately 20 percent of state general funds,¹⁰ while the federal share of costs will rise to approximately $199 billion in 2007.¹¹ Although these amounts may seem miniscule compared to other government expenditures, some analysts predict that the combined costs of Medicaid, Medicare, and Social Security could consume more than a quarter of the gross domestic product by the year 2050.¹²

Pressing against this broader budgetary quagmire, the nation`s persistent reliance on Medicaid to finance long-term care for the elderly has become one of the most imperative dilemmas facing policy-makers today.<sup>13</sup> Medicaid was created in 1965 under Title XIX of the Social Page 381 Security Act<sup>14</sup> as a federal and state partnership.<sup>15</sup> The program was originally designed to provide healthcare coverage for low-income families who meet eligibility requirements for the Aid to Families with Dependent Children program.<sup>16</sup> More recently, the Medicaid program has been expanded to include a wider range of families;<sup>17</sup> pregnant women;<sup>18</sup> the aged, blind, and disabled;<sup>19</sup> and acutely or chronically ill individuals who lack private healthcare insurance.<sup>20</sup> Medicaid has also become the nation`s primary payer source for long-term care.²¹ Since long-term care services are beyond the scope of Medicare and most private healthcare insurance programs,²² Americans in need of long-term care come within the "medically needy" classification: they are entitled to receive Medicaid benefits if they cannot pay privately.

To be sure, most Americans are unable to finance long-term care without governmental assistance and must turn to Medicaid when the Page 382 need arises.²³ A number of trends converge to create this heavy reliance on public assistance. Many seniors do not have private long-term care insurance²⁴ and most lack sufficient financial resources to pay the high cost of long-term care.²⁵ Meanwhile, many others simply ignore the need to plan for long-term care expenses, and enroll in Medicaid once the need arises.²⁶

Since Medicaid is a means-tested program, beneficiaries must meet specific asset and income criteria.²⁷ Applicants with some savings will be required to "spend down" assets on long-term care services.²⁸ Medicaid will assume the cost of long-term care only after the applicant has exhausted most personal sources of funding.²⁹ Applicants are permitted to retain the principal residence and other exempted assets; however, these assets can be seized by the state upon the beneficiary`s death, up to the value of benefits received.<sup>30</sup> To avoid the consequences of these provisions, many Americans engage in "voluntary impoverishment" by making inter vivos gifts of property to meet Medicaid`s asset and income qualifications.³¹

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While statistics vary by state, almost two-thirds of all nursing home residents nationwide receive Medicaid benefits.³² Elderly persons in need of long-term care services comprise a significant portion of Medicaid`s total program beneficiaries. In 2004, approximately 35 percent of total Medicaid dollars were used to support long-term care for the elderly.³³ If the Medicaid program remains the primary payer source for long-term care, then the percentage of total Medicaid dollars spent on long-term care for the elderly will likely increase significantly over time. Not only are long-term care costs expected to rise,³⁴ but the number of elderly beneficiaries will likely increase as well-particularly as the baby boomers enter old age.³⁵

In response to this fiscal predicament, policy-makers have identified a need to alleviate the burden of long-term care costs by encouraging those with sufficient financial resources to look beyond the Medicaid program for long-term care financing.³⁶ The federal and state governments have developed tax and economic policies to discourage reliance on Medicaid and encourage reliance on private resources. These incentives, which are discussed in detail in subsequent sections, include federal and state income tax deductions for the cost of long- term care insurance, Medicaid partnership programs to encourage the use of private insurance to pay for the minimum duration of care, and federal and state tax incentives for families that provide in-home care to loved ones.³⁷ These initiatives appear to be producing the desired short- term behavioral outcome: increasing numbers of Americans are purchasing Page 384 long-term care insurance,³⁸ and in-home care remains a viable option within many families.³⁹

However, although these indicators suggest that consumers are responding to tax and economic incentives, it is not necessarily clear that these responses will provide a durable or even adequate solution to the more imperative Medicaid financing crisis. In fact, the underlying expectations of policy-makers may be flawed. Policy-makers seem to expect that private long-term care insurance policies purchased today will ultimately assume the insured`s lifelong risk of long-term care expenses, thereby removing the need to seek Medicaid benefits for such care.40 This expectation requires that consumers purchase a policy, and then maintain that policy until long-term care needs arise. To achieve these ends without implementing a compulsory program, policy-makers must substantially modify consumer behavior-not simply in terms of their short-term immediate responses to financial planning...