The rich are using long-term care funds meant for the poor

Medicaid is a major payer for long-term care (extended-stay nursing home and home care for the disabled) in the United States. This health care program, intended for the poor and funded by federal and state governments, covers almost half of all long-term care spending, now nearly $500 billion a year. 

With the aging of the population and the declining birth rate, government spending on long-term care is expected to increase rapidly as people become disabled and family members providing free home care become rarer. These trends will cause Medicaid-provided long-term care to take up more and more of the government’s budget and national income. It is therefore important that Medicaid long-term care benefits be targeted to those who do not have the resources to pay for care, and not to those who have significant assets or the ability to purchase private insurance. 

Unfortunately, several studies show that many older people with significant real estate and financial asset holdings get long-term care from Medicaid for free or at subsidized rates. These findings should not be surprising because, in many states, the rules and administration of the program are loose and porous, and little effort is made to recover assets from the estates of deceased Medicaid users, despite this being required by federal law. By my estimate every year almost $6 billion of Medicaid funds are inappropriately used for the long-term care of individuals with significant asset holdings. Breaking this amount down, almost $3 billion could be recuperated from enhanced estate recoveries and more than $3 billion from retirement assets.

Why is that? Because many states do not count retirement assets in assessing whether the individual is impoverished and eligible for Medicaid. By my estimate, this exemption alone amounts to a more than $3 billion loss to the government annually. Besides representing considerable resources for Medicaid, it is unfair because retirement assets, which have extensive tax advantages, are intended for spending on health and long-term care during old age, not for bequests. Also, despite federal law requirements, most states make little or no effort to recover assets from the estates of deceased Medicaid beneficiaries, whether real and financial. 

Legislation introduced earlier this year by Rep. Jan Schakowsky (D-Ill.,) if passed, would worsen the problem by repealing the federal requirement that state Medicaid programs go after families and estates for repayment of long-term care services. In 2020, less than $700 million was recovered, which I estimate represents less than 3 percent of the $48 billion in total estates of deceased Medicaid beneficiaries in aggregate every year. 

Of course, there are many (legally consistent) legitimate reasons which explain why some assets are not recoverable, but the superior results of states like Iowa and Idaho, which have 10 percent recovery rates by my estimate, show that much more can be done. California, which represents more than one-seventh of total U.S. economic activity, has yet to adopt the requirements of the 2005 federal law that tightened eligibility for Medicaid long-term care benefits. In fact, by removing all asset eligibility tests, California is seeking to move in the opposite direction. And despite several improvements to the 2005 law, there are still many techniques employed by lawyers of well-to-do families in all states which enable the transfer of assets to qualify their elderly disabled relatives for Medicaid.

I, therefore, recommend that Congress amend the law with the following rule changes:

1. Count retirement assets in eligibility tests for Medicaid, as most states do, but some large states do not.
2. Set reasonable but increasingly ambitious goals for states — based on the best practices and experiences of successful states — for estate recovery efforts. If not met, these goals should be enforced by a penalty that reduces matching federal funds for Medicaid.
3. Require California to meet all current federal law requirements in this area, again enforced by a federal funding penalty.
4. Outlaw asset transfer techniques used by the wealthy.

These reforms would make Medicaid fairer, more sustainable and more consistent with the value of self-reliance — not government dependence by the well-to-do. It would also encourage the use of private insurance and increase asset accumulation. This is particularly important now, with an aging population, large and prospectively growing federal budget deficits and the impending exhaustion of funds for Social Security and Medicare in the next few years.

Mark Warshawsky is the Searle Fellow at the American Enterprise Institute and the vice chair of the 2013 Federal Commission on Long-term Care. This op-ed is based on his article “Steps to Make Long-Term Care Financing Fairer and More Sustainable” which appeared in the August 8, 2022 volume of Tax Notes Federal.