As the Super Committee falters in its effort to reduce federal spending, mandated budget reductions create further pressure on the funding of long-term care
Earlier this year, the so-called Super Committee could not overcome partisan differences over spending cuts and new revenues (taxes) within their mandated deadline and conceded defeat. That unfortunate outcome triggers mandated reductions in the federal budget of $1.3 trillion that will have an immediate impact on Medicare and Medicaid. This will be particularly disruptive for seniors and long term care providers already trying to absorb the 11.1% rate reduction that CMS instituted in October, 2011. After the demise of the CLASS Act, the long term care funding infrastructure of the United States is facing extreme pressure. Lackluster sales, rate increases and carrier casualties in the LTCi market combined with additional entitlement cuts as a result of the Super Committee outcome will conspire to make an already precarious situation worse.
People do not understand and are not prepared to pay the costs of long term care. In years past, seniors could rely either on the government, family, or equity in assets such as a home to offset a lack of savings. In today’s new economic reality, family members are struggling to take care of themselves, the government is making cuts and building barriers to entry for long term care coverage, and the value of assets such as homes have been eviscerated. In fact, today there is currently three times more in-force life insurance in the United States at almost $30 trillion (NAIC) than there is home equity with less than $10 trillion (Zillow Home Equity Index).
For the first time in American history there is more debt than equity in America’s homes. For seniors unprepared for long term care this new reality is a big problem. One of the most reliable sources of long term care funding for years has been home equity and then government backstops once assets have been depleted. This mix is now severely disrupted and a search for additional assets to help unprepared seniors pay for long term care is on.
Providers of long term care services such as nursing homes, assisted living communities and home health agencies, as well as state governments, are realizing that there is tremendous value for the consumer in converting life insurance policies to help pay for the costs of long term care. By converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered by the monthly long term care benefit payout and the life insurance asset can be spent-down in a Medicaid compliant fashion.
With traditional resources to pay for long term care on the decline, it will take creative private market solutions and the use of non-traditional assets to make up the difference.