When Medicaid was created on July 30th, 1965, the entire GDP of the United States was $791.1 billion, and no one could have predicted that by 2009 the U.S. would spend over $2 trillion on health care in a single year. Today, Social Security, Medicare and Medicaid are all in the red and creating havoc for government budgets at the federal and state levels. According to Chairman Ben Bernanke, this has become the number one concern of the Federal Reserve about the U.S. economy.
State budgets have been impacted particularly hard by shrinking tax dollars and growing Medicaid enrollment brought on by the economic crisis and an aging population. Over 10 million Americans now require long term care annually and Medicaid is the primary source of coverage. According to the Kaiser Family Foundation, Medicaid spent $427 billion in 2011, almost doubling since spending $240 billion in 2009.
Long term care providers prefer private pay patients over Medicaid recipients. A new report released by the American Health Care Association (AHCA) indicates that due to major state budget deficits and adjustments to Medicare and Medicaid reimbursements, long-term care facilities will see historically low Medicaid reimbursements. It is estimated that unreimbursed Medicaid funds to nursing homes exceeded $6.3 billion in 2011 – a $19.55 shortfall per patient, per day on average.
Because a life insurance policy is legally recognized as an asset of the policy owner, it is an unqualified asset and counts against them when applying for Medicaid. For Medicaid applicants, it has been standard practice to abandon a life insurance policy if it is within the legally required five year look back spend-down period. Billions worth of in-force life policies are regularly abandoned by uninformed seniors as they enter their “long term care years”. But now, by converting a life insurance policy instead of abandoning it, the policy owner’s care can be covered as a private pay patient by the long term care benefit plan over an extended time frame.
Converting a life insurance policy into a long term care benefit plan is a Medicaid qualified spend-down. Instead of abandoning the policy and going immediately onto Medicaid, the time a person remains private pay is extended while the present day value of the life insurance asset is spent-down in a Medicaid compliant fashion—all while preserving a portion of the death benefit for the family during the extended time period.
In January, 2012, the Center for Economic Forecasting and Analysis (CEFA) of Florida State University analyzed the tax savings impact of converting life insurance policies into long term care benefit plans on the Florida Medicaid budget. In their analysis, CEFA “scored” the annual savings for Florida’s tax payers at approximately $150 million. The savings come from extending the time Medicaid applicants with a life insurance policy can remain private pay, delaying entry onto Medicaid by first converting their policy to a private, long term care benefit account.