CHAPTER NINE – OTHER ALTERNATIVES TO LTCI

 

MEDICARE

There are limited benefits for long-term care from Medicare.  For those who are interested, Medicare was defined as “The Health Insurance for the Aged Act, enacted by the 89th Congress and became effective in 1965, and it was designed to pay expenses arising from acute medical care for the elderly, and for disabled persons of any age.  Actually, Medicare is the result of the health insurance industry not being able to provide adequate or affordable health care to the elderly.  Several insurance companies tried prior to 1965, but either the premiums were too high or the claims were too high.  In any event, none were successful, but with a growing block of unhappy constituents, there was little choice other than to allow the health care cost of the elderly to fall upon the federal government.  Even though many in the private health insurance sector felt that it was a deathblow to the industry, they soon had to acknowledge that it was totally necessary at that time. 

It is administered by the Social Security Administration and is financed by payroll deductions.  Medicare pays limited health care costs for people who qualify—who are all persons over 65 who qualify for Social Security are entitled to the benefits, as well as disabled workers who have been eligible for Social Security disability benefits for at least two years.

Medicare has two parts: Hospital Insurance (Part A) and Medical Insurance (Part. B). Those persons eligible for Social Security or Railroad Retirement benefits as workers, dependents or survivors, are automatically eligible for Part A, Hospital Insurance, when they turn 65. If a person has not worked long enough to be covered for benefits, he may enroll in Part A and pay a monthly premium. If Medicare Hospital Insurance is purchased, that person must also enroll in Part B, Medical Insurance. Medicare is not based on financial need. Anyone who meets the age and/or coverage requirements is eligible.

Participants in the Medicare program are liable for co-payments and deductibles as well as for monthly payments for Part B coverage.

Medicare does not pay for all medical expenses and in most cases it is supplemented with private insur­ance called “Medigap,” or more commonly, as “Medicare Supplement” policies.  In some areas, an individual may enroll in a Managed Care Plan (Medicare HMO) that contracts with Medicare.

Medicare Eligibility

Medicare is a an entitlement program (everyone is entitled to it who meets the requirements) and the following are entitled to Medicare Benefits:

  1. Persons who are 65 or over and eligible for Social Security Retirement benefits or federal employees;
  2. Workers, of any age, with disabilities, who have been eligible for Social Security Disability benefits for at least 24 consecutive months;
  3. Widows or widowers with disabilities age 50 or over who have been receiving Social Security for at least two years through a spouse; or
  4. Persons who have End State Renal Disease (ESRD), usually with a three-month waiting period.

Medicare Part A Enrollment

Medicare pays for hospital services (Part A) and medical (physician) services (Part B), limited nursing home, home health care and hospice benefits.  The level and scope of nursing home coverage focuses on post-acute care and does not fully cover extended care or custodial needs, nor did it intend to.  Coverage under Medicare Part A is automatic and there is no premium for qualifying individuals or their spouses.

Medicare Part B Enrollment

Although people are automatically enrolled in Part B when they enroll in Part A, they may elect to decline this coverage.  Part B coverage requires payment of a small premium, currently $66.60 per month (2004) and those on Social Security usually has it deducted directly from their Social Security benefit payments each month.

People who initially do not elect Part B coverage may sign up for this coverage during an annual general enrollment period from January through March each year but coverage will not become effec­tive until July of the year in which he or she signs up.  They must also pay a 10 percent higher premium for each full 12 months that the individual did not participate after becoming eligible.  This happens infrequently, usually when is person retires from certain government position or when they are recent citizens.  If, for instance, a person became eligible when they were age 65, but they did not take out Part B until they were age 70, then their Part B premium would be 50% higher (for instance, 2004, the premium would be $100 a month).

Medicare throughout the years has gone through a multitude of changes, and is a continuing state of flux as they try to keep medical expenses under control.  Benefits, financing, and even method of operation have all changed since inception.  The only way Medicare can hold down the cost of Medicare care is by shifting a significant share of medical expenses to the beneficiary in the form of deductibles, coinsurance and benefit caps, plus continual negotiation with the medical providers. 

Medicare Part A - Hospital Insurance Benefits

Medicare Hospital Insurance (Part A) pays for medically necessary inpatient care in a hospital, skilled nursing facility, psychiatric hospital or hospice.  In addition, Part A pays for the cost of medically neces­sary home health care and 80 percent of the approved cost for durable medical equipment supplied under the home health care benefit. Certain deductibles, coinsurance and limitations apply to Part A coverage.

Basically, Part A hospitalization benefits cover the following:

  1. Semiprivate room and board;
  2. Regular nursing services;
  3. Drugs furnished by the hospital;
  4. Lab tests, X rays and medical supplies such as dressings, splints and casts;
  5. Blood transfusions, except for the first three pints, which are paid for by the Medicare recipient;
  6. Use of durable medical equipment such as wheelchairs as long as the equipment is used while the person is an admitted inpatient at a hospital;
  7. Use of the operating room, recovery room and special-care units, such as intensive care; and
  8. Rehabilitation services, including physical therapy.
Medicare Part A Deductibles And Co-Payments

The first 60 days of hospitalization in each “benefit period” are covered in full with the exception of the deductible of $876. During the 61st through the 90th day the patient is responsible for a co-payment of $219 per day. After that, the patient must use one of his or her 60 “lifetime reserve” days and pay a copayment of $438 per day (2004). Once the lifetime reserve days are used up, the patient must pay the full charges themselves.  The “benefit period” ends 60 days after discharge from the hospital or skilled nursing facility.  If another hospital admission occurs after that, a new benefit period begins with a new deductible and 90 days of hospitalization (subject to co-payments).  The 60 lifetime days however can only be used once are not restored in a new benefit period.

Medicare Part A Exclusions And Limitations

Under Part A, the following items and services are excluded:

  1.   Services not reasonable or medically necessary;
  2. Routine foot care and orthopedic shoes, except for diabetics;
  3. Items or services for which you are not legally obligated to pay;
  4. Most chiropractic services;
  5. Services paid for by the government or workers’ compensation;
  6. Cosmetic surgery (except after an accident);
  7. Services performed by a relative or household member, at home;
  8. Most prescription drugs and medicines taken which are self-administered;
  9. Most immunizations;
  10.   Services outside the US (exceptions are Canadian and Mexican facilities if they are nearest to your home or for emergency care while you are traveling to or from Alaska through Canada);
  11. Private nurses and extra charges for a private room (unless medically necessary);
  12. Telephone, television, and other personal comfort items;
  13. Routine physical exams, eye exams, glasses, hearing aides, and dental care;
  14. “Intermediate” or “custodial care”182
Medicare Part A Diagnostic Related Groups

Because of the many variations of health care, a standard system that can be universally applied for billing purposes was needed as it was not practical or efficient for Medicare to pay whatever charges the hospital decided that they needed.  There have been variations but today payment is based upon a diagnostic related grouping (DRG) whereby when a doctor makes a diagnosis of the patient’s condition and orders a hospital stay to help cure that illness or injury, the diagnosis establishes the DRG.  The system basically is that possible diagnosis are classified into 23 major diagnostic categories, and then subdivided in 477 additional categories.  Nearly all hospital services fall into one of the DRG classifications, each with a pricing schedule of the amount that the hospital will receive.  The hospital receives this payment regardless of how long the patient is actually in the hospital.

Because of the billing system, Medicare has provided an incentive to hasten the recovery time after a procedure as the less time that the patient stays in the hospital, the more profitable it is to the hospital.  “Quicker and sicker” is a term that has been used to describe this system that has caused criticism although it has resulted in reducing the recovery time for hospitals, thereby resulting in a longer recovery time at home or in a nursing home.

Medicare Part A Hospice Care

Terminally ill patients may elect to receive hospice care under Part A, in lieu of other Medicare benefits.  Medicare benefits for this care are available for up to 210 days for patients who are considered termi­nal. This period can be extended, if necessary, as long as a doctor certifies the care is needed. The patient pays 5 percent of the cost of prescription drugs (not to exceed $5 for each prescription) and 5 % of the cost of respite care (not to exceed five consecutive days or more than the current Part A deductible.

Medicare Part B: Supplementary Medical Insurance

Part B is the medical expense portion of Medicare and pays for covered medically necessary services regardless of where they are received.  Part B covers the following:

  1. Surgeons’ and physicians’ fees outpatient services,
  2. Medical lab fees,
  3. Ambulance costs,
  4. Some outpatient psychiatric care,
  5. Durable medical equipment, such as hospital beds, wheelchairs and oxygen equipment, if ordered by a physician.
Medicare Part B: Deductible and Co-Payments

The Medicare beneficiary is responsible for the first $100 of Part B costs (a deductible of $100), and a co-payment of 20% of all covered expenses, in addition to the monthly premium.

Medicare Part B: Exclusions and Limitations

Under Part B, the following items and services are excluded:

  1. Services not medically necessary;
  2. Routine physical exams, eye or hearing exams and related tests:
  3. Eyeglasses, hearing aids or dental care;
  4. Most immunizations;
  5. Services of a chiropractor, except for conditions detected by an X ray;
  6. Full-time private nursing care in the home;
  7. Homemaker services provided by a relative or household member; and
  8. Prescription drugs that can be self-administered or taken at home.

 

Medicare Coverage of Long Term Care

Medicare covers nursing home care only when:

  1. The individual is admitted to a skilled nursing facility (SNF).
  2. The SNF is Medicare ‑ certified.
  3. The individual is receiving skilled medical care that can be provided only in the SNF and only by skilled medical personnel.
  4. The individual was previously hospitalized for at least three consecutive days.
  5. The individual is admitted to the SNF no more than 30 days after discharge from the hospital.
  6. Admission to the SNF is to receive care for the same illness or condition for which the individual was previously hospitalized.

Every one of these requirements must be met in order for Medicare to pay any part of nursing home costs.  Then, coverage lasts for no more than 100 days.

Medicare pays the full cost only for the first 20 days.  The individual must pay part of the cost for days 21 through 100.  In the year 2005, the individual’s part is $114 per day.  The individual’s portion changes every year as prescribed by the Social Security Administration.  If more than 100 days of care are required, the individual must pay all costs.

Conversely, what does Medicare not pay? There is no coverage for:

  1. Care in an intermediate or custodial care facility or any community‑based residential facility.  About 75% of nursing facilities are this type; only about 25% are skilled.
  2. Care in a SNF that Medicare has not approved.  Only about 40% of SNF’s are Medicare ‑ certified.
  3. Custodial care, even if it is provided in a Medicare ‑ certified SNF, if that is the primary type of care being provided.
  4. Admissions not preceded by three consecutive days in the hospital.
  5. Admissions later than 30 days after hospital discharge.

 

The facts are that most people who require long‑term care (1) do not require the one type of care Medicare pays for ‑ skilled nursing ‑ and (2) are not hospitalized prior to admission to a nursing facility.  One study for the U.S. government found that as many as 95% of people requiring long‑term care need only custodial care‑help with the activities of daily living.

Medicare Supplement regulations do not allow the sale of any insurance policy that duplicates Medicare Supplement coverage; however, a Long-term Care Insurance policy is now excluded.

The Medicare program is intended to cover services that will help the Medicare beneficiary to recover from a medical condition, and was never intended to provide care for people with chronic care needs.

Nationally, only about 4 percent of nursing facility patient days are supported by Medicare. California slightly exceeds this national statistic, having approximately 8 percent of its long term care population supported by Medicare.

To apply for Medicare or obtain information about the program, contact the local office of the Social Security Administration. For a free copy of The Medicare Handbook, write to CMS, Office of Public Affairs, 200 Independence Ave. SW, Washington, DC 20201, or call the Medicare Hotline at              1-(800) 772­1213, or, log onto www.medicare.gov.

The fact that Medicare covers the beneficiary for up to 100 days of nursing home care can be misleading.  Actually, while most (80%) of those being admitted to nursing homes had been hospitalized immediately prior to admittance, Medicare recipients rarely use the 100 days of long-term care coverage as the average coverage is about 23 days. 

Medicare Part A can help pay for up to 100 days of skilled care in a skilled nursing facility (SNF), which may or may not be a nursing home as a SNF provides skilled nursing and rehabilitation services.  However, Medicare will not pay for any part of a beneficiary’s stay in a SNF (or any other facility) if the services received are primarily personal or custodial, e.g., assistance in performing ADLs.

Even if a beneficiary were to stay the entire100 days, they would still have to pay $9,120 (2005).

Summary of Medicare LTC Caveats

In order for Medicare to cover skilled nursing care:

  1. The condition must require daily skilled care, not custodial or basic care,
  2. The beneficiary must have been in a hospital for at least three consecutive days for the same condition that will be treated in the SNF,
  3. The beneficiary must be admitted to the SNF within 30 days after discharge from the hospital,
  4. A physician must certify that the beneficiary needs and has received, SNF daily since admission to the hospital, and
  5. The care must be “restorative,” i.e. the beneficiary must be improving —when the beneficiary is considered as “stable” Medicare payments cease.
Home Health Care Under Medicare

Because so many services are now available in an Individual’s home, from professional nursing care to housekeeping, it is difficult to attach an actual dollar figure.  People are likely to think of home care as being considerably less costly than care in an institution, and in some cases that’s true.  For example, a home health aide, earning $10 an hour in some locales, who helps in the home for two hours a day three times a week does create a large expense.  However, HIAA estimates that many people receiving help at home with ADL’s alone currently pay as much as $1000 per month ‑ $12,000 annually.  Skilled professionals such as a registered nurse or physical therapist may be paid up to $70 per hour for home visits.

Adult day care is no less expensive than day care for children‑and is often more expensive because of the availability of extra services, particularly those related to health care.  Daily charges can range from $50 to $200 according to the American Association of Retired Persons (AARP), probably the best-known organization serving older people in the U.S.

These figures emphasize both the lower and upper extremes.  Recent figures from a state located in one of the average‑cost geographical regions of the, U.S. indicate that home care, adult day care, respite care and hospice care costs average $15,000 or less per year.  However, the more frequently the services are provided and/or the more skilled the person providing them, the more costly they will be in any region.

According to the Centers for Medicare and Medicaid Services, expenditures for home health care dropped from $18 billion in 1997 to $10 billion in 2002.

 

Home health payments by Medicare increased an astounding 25% a year between 1990 and 1997,about 4 times the health care inflation rate.  In 1996, Congress passed the Balanced Budget Act (BBA) and along with HIAA of the same year, access to Medicare home health was restricted and the intent of only covering acute-care recovering patients was reas­serted.  In November 1997, under BBA, Medicare adopted an interim payment system based on a projected 1999 implementation of a Prospective Payment System for home care. PPS greatly re­stricted eligibility and reimbursements for homebound patients. Medicare home health benefits went from a high of $18.3 billion in 1997 to $9.5 billion in 1999, a drop almost in half. At the same time demand for covering more home care patients increased.  After 1997, the number of home health agencies fell by a large amount almost overnight.  Home health was 8.8% of Medicare’s budget in 1997. In 1999 it was 4.6% of the budget.  Medicare paid 35.6% of home health costs in 1998.

In an attempt to shore-up the ailing Medicare system, the Balanced Budget Act of 1997 implemented sweeping cutbacks in Medicare skilled nursing facility and home health benefits.  The BBA made health care providers very unhappy by paying Medicare providers at the Medicaid rate (almost always lower than the Medicare rate) for care to persons eligible for both programs.  These cuts make LTC Insurance even more important now than in the past.

Under Medicare’s prospective payment system, each patient is assigned to a diagnosis-related group (DRG) at the time of admission (discussed earlier).   Under the Balanced Budget Act, payments for skilled nursing care will also be made using the Pro­spective Payment System and will further reduce Medicare payment for nursing home stays.

Medicare will pay for some home health care, but this is also extremely limited, and being reduced by the BBA.  With patients being discharged as soon as possible, more patients require additional rehabili­tation and recovery time in a long-term care facility.183

As quoted in the Medicare Guide: “Medicare pays the full cost of medically necessary home health visits by a Medicare-approved home health agency.  A home health agency is a public or private agency that provides skilled nursing care, physical therapy, speech therapy, and other therapeutic services.  A visiting nurse and/or home health aide provides services on an intermittent or part-time basis, not full-time.”

“To qualify for coverage you must:

  1. Need intermittent skilled nursing care, physical therapy, or speech therapy,
  2. Be confined to your home,
  3. Be under a doctor’s care.

A stay in the hospital is not needed to qualify for the home health benefit, and you do not have to pay a deductible or coinsurance for services.  You do have to pay 20 percent of the approved amount for durable medical equipment such as wheelchairs and hospital beds provided under a plan-of-care set up and reviewed periodically by a doctor.”

“You pay:

  1. For full-time nursing care and drugs.
  2. For meals delivered to your home.
  3. Twenty percent of the Medicare-approved amount for durable medical equipment, plus charges in excess of the approved amount on unassigned claims.
  4. For homemaker services that are primarily to assist you in meeting personal care or housekeeping needs.”184

Note the key requirements:

  1. Services must be skilled nursing care, physical therapy, speech therapy or other therapeutic services.  Many Seniors are convinced that they will receive full time care and Medicare or their Medicare Supplemental policy will cover it.
  2. The patient must be homebound, confined to the house, and not able to go shopping or visiting with friends and family.
  3. The patient is fully responsible for homemaker services to assist them in personal care or housekeeping needs.

 

In the past, doctors have been very lenient and have continued Medicare home health care even after the patient no longer needed skilled nursing care.  With the recent emphasis on Medicare abuse, these abuses have diminished and ceased almost entirely in most areas.

LONG-TERM CARE COVERAGE UNDER HEALTH INSURANCE PLANS

Standard health care policies currently pay less than 1% of LTC costs. Health insurance policies are designed to provide benefits for doctor, hospital, surgical or emergency medical care. Traditional forms of health insurance do not satisfy the LTC need. Some policies may offer optional benefits for skilled nursing care or convalescent home care, but these benefits require prior hospitalization and are gen­erally provided for a short time. They do not cover other forms of care (such as custodial) and do not cover non-medical care that may be needed on a daily basis.185  


 

Medicare Supplement Insurance

There are limitations to Medicare, so most Medicare recipients purchase Medicare Supplement Insurance policies (a.k.a. “Medigap”) to help pay for deductibles, coinsurance, benefit limitations, and some other exclusions.  The cardinal rule of Medicare Supplement Insurance is that it will not pay for coverage that Medicare does not approve.  Medicare does not object if additional benefits are provided, although there is very little than cannot be covered with one of the standard  policy forms.

Medicare Supplement policies are closely regulated by the federal and state government, and there are 10 base policies allowed, each different than the others.  Basically, all companies who market Medicare Supplement policies provide the same coverage.   In addition to these traditional contracts, many seniors are opting for the senior HMO alternatives, which combine Medicare coverage with preventive care.

Even though many supplements will cover the daily co-payment for the 21st through the 100th day of skilled nursing home stays, care in a skilled nursing facility for more than 20 days rarely meets the Medicare’s strict requirements for coverage.  Medicare Supplement policies follows Medicare (“supplements” Medicare) therefore, this benefit is available only for care in a certified skilled nursing facility following a period of prior hospital confinement and nothing is payable after the 100th day, benefits are not payable if the beneficiary was not hospitalized, receives intermediate/custodial/community or home care.  For Medicare recipients, it is most important that they understand that if Medicare does not cover the care, neither does the Medicare Supplement.

An optional coverage may be purchased to provide at home recovery benefits, but is limited to a small amount per visit as well as only a few visits per year. In addition to the dollar and time limitations, this benefit applies only in cases of “recovery” following an illness, injury or surgery.  No benefits are payable for any insured who needs any type of care due to a progressive disease or the general effects of aging.

Medicare Managed Care

In certain geographical areas, those eligible for Medicare may opt for a managed care plan, usually a “Medicare HMO.”  These plans are not available everywhere, but are available in most of California (the “home” of the HMO).  There are advantages of managed care, principally because of the prescription drug benefit that provides drugs at a very low deductible.  The disadvantage is the lack of choice of participating health providers as approved providers must provide all services. 

In any event, services in the area of long-term care run practically the same as that provided by Medicare and Medicare Supplement policies.  Even short-term nursing home covered by Medicare managed care is available only in participating facilities.

INFORMAL CARE BY FAMILY OR FRIENDS

Another alternative to LTCI is informal care provided by family, friends, volunteers and community services which is principally help with daily activities, such as cooking, cleaning, transportation, yard work, shopping, paying bills, and companionship.  Gradually they may need more and more help such as assistance in bathing, dressing or eating.  These types of services can be provided to a person not needing medical care as well as to a person who is receiving medical care.

Informal care may occasionally substitute for insurance as a strategy for providing LTCI when the cost of insurance is difficult to justify and family members or friends are available to provide the care (or the person has a maid that can be trained to be a caregiver…).  Because family and friends are involved, this is another reason it is recommended that a person considering the purchase of a LTCI policy discuss the matter with family members.

Even when LTCI is purchased, informal care may still be provided to keep costs down.  With the modern comprehensive plan, in particular, it is to the advantage of the individual to keep the expenses to a minimum whenever practical, so that more funds will be available if more expensive care is required in the future.  Keeping a person out of a nursing home is usually be best way to keep down expenses of custodial care, particularly if it can be performed on a volunteer basis.

There are limitations for informal care, however.  It cannot indefinitely substitute for all types of long-term care and it does not provide any kind of medical care.  There is no guarantee that a person may not require confinement in a long-term care facility, but without LTCI, the individual and/or family members will have to pay the expenses.

An informal caregiver cannot be expected to assist someone for long period of time.  Not only does the caregiver have personal needs that need attention, often they cannot stand the emotional, physical or financial stress of caregiving. 

Not everyone can be a caregiver, and it is particularly difficult if they are furnishing care for a loved one.  Some provide the care for just as long as they can until they are emotionally exhausted, and sometimes the caregiver will need care.

Physically, not everyone can care for a disabled person.  Taking care of a person all day, and sometimes, all day and all night, can be physically demanding, particularly if the disabled person needs physical assistance, such as physically picking them up or moving them about, etc.  The Respite Care in an LTCI policy is invaluable to these persons as it gives them time to recuperate.

It was mentioned earlier, but usually it is less costly to provide care in a nursing home compared to around-the-clock care at home by professionals.  There can be $2000 - $4,000 more for home care.  On top of that, many families today depend upon two wage earners, and if one of them has to stay at home to attend to a disabled relative, that can severely affect their finances—another good reason to have family members included in Long Term Care Insurance discussions.

HOME EQUITY CONVERSION

The largest investment most Americans have is their home.  It has always been a good investment, by itself, and in certain parts of the country, it has been an outstanding investment.  Therefore, often people may have a difficult time paying for long-term care because of cash flow reasons, basically since most of their money is invested in their home.  This is particularly true of the elderly, many of whom have lived in the same house for so many years that they no longer have a mortgage, or if they do, it has been reduced considerably.  It is estimated that 70% of the net worth of elderly Americans consists of equity in their homes, 73% own their homes and 84% are free of mortgages—in California 80% of the homes of those over age 65 are mortgage free and that is a state with very high real estate costs!

Even though the home is “exempt” when qualifying for Med-Cal, it is still subject to estate recovery.

People with large estates that would try to spend down may not have liquidity and may be forced to sell investments or property, at a loss. If they have a lot of equity in a house, but have little cash, they may want to consider a reverse mortgage to leverage the money from their home to pay for LTCI instead of paying premiums out of income needed for living expenses.  This is a difficult idea for many seniors, however.  One accountant tells of a man who was living in a half-million dollar home with no mortgage, but barely scraped by on an annuity and small pension.  When advised that perhaps in preparing for the event of his needing long term care, he consider taking a home equity conversion to pay for LTCI premiums, his response was that he had worked all his life so that he could own his own home and he wasn’t “going to give his house away so some insurance company can take his money for something that may never happen!”

A reverse annuity mortgage (RAM) is a financial device that allows homeowners to convert the equity in their homes to a regular income stream (similar to the Reverse Mortgage discussed below).  What this does, actually, is that the homeowner sells his home to a bank or other financial institution and is paid for his house by “annuity” payments over a period of time—installment income payments—that could be used for long-term care expenses.  There is a limit—once the value of the home has been paid, he no longer owns his home or has income.  Conversely, if he dies before he receives full compensation for his house, the remainder goes to a named person or his estate, otherwise the financial institution ends up owning the home.

A similar arrangement is offered through HUD (Housing and Urban Development) and their HECM (Home Equity Conversion Mort­gage) program.  This is available only to persons 62 and over which gives them an opportunity to borrow money without having to worry about income requirements.  The only qualification requirement is the equity in the home since no payments are required until the home is sold or vacated for other reasons.

This arrangement can be attractive to a person on a fixed income who needs to have funds for long-term care expenses and he does not have insurance.  The borrower can live in the house as long as he is alive as he cannot be forced from his home, even if he still occupied it beyond the term of the reverse mortgage.  The loan must be repaid upon the death or vacating of premises of the last person who is eligible to live there.  Repayment of the amount is usually through the sale of the house, and any excess proceeds are payable to the heirs of the deceased homeowner, or his estate.  If the sale of the house does not produce enough to pay off the loan balance plus accrued interest, there will be no deficiency judgment against the estate because the loan is insured through FHA (Federal Housing Administration).

This sounds very good but is not always the answer for many seniors as there are fees, points and other closing costs—there always is when real property is sold or bought—plus mortgage insurance and servicing fees, plus the interest.  Seniors must attend mandatory HUD counseling before taking out the loan so that there can be no questions as to whether they fully understand what they have done.

More information, including a list of approved lenders, can be obtained from your local HUD office, or request the booklet “Home Made Money” from AARP Home Equity Conversion Service, 1900 K Street, NW, Washington, DC 20d49 or online at http://www.aarp.org/revmort/

Reverse Mortgages

Until recently, there were two main ways to get cash from equity in a home, either sell the house and move out, or borrow against the home and make monthly loan repayments.  Now there is a third way—reverse mortgages.  Simply put, a reverse mortgage is a loan against the home that does not have to be paid back for as long as the borrower lives in the house.  Proceeds can be paid all at once, as a regular monthly advance, or at times and in amounts that they choose.  The loan is repaid plus interest when the homeowner dies, sells the house, or permanently moves out of the house.

Eligibility

All persons who own the home must apply for the reverse mortgage and sign the documents.  They must all be at least 62 years old (for most reverse mortgage arrangements) and they must occupy the house as a principal residence i.e., live there most of every year.  Single-family one-unit dwellings are eligible properties for all reverse mortgages, although some programs accept 2-4 unit owner-occupied, condominiums, planned unit development and manufactured homes.  Mobile homes and cooperatives are generally not eligible.

Details of Reverse Mortgages

Similar to the Home Equity Conversion, reverse mortgage loans typically require no repayment for as long as borrowers live in the home, but upon the death of the last living borrower or sale of the house or a permanent move from the house, the principal and interest and other charges become due and must be repaid in full.

The main difference is that no monthly payments are made and the mortgage loan is usually paid in a lump sum.  The danger here is that the amount owed grows larger over time—remember the shock upon the purchase of your first home when the monthly statement shows that the equity increased an infinitesimal amount because most of the house payment went to pay off the interest?  That happens with a reverse mortgage, the amount due grows because of this interest factor but the debt grows larger over time but as the debt grows larger, the amount of money left after selling and paying off the loan, leaves a small equity—the interest factor at work again!  However, the borrower can never owe more than the value of the home at the time the loan is repaid.  Since the value of real estate usually grows faster than the interest, the creditor will nearly always make money on these types of arrangements.

Reverse mortgage borrowers continue to own their homes and therefore, they are responsible for property taxes, insurance, and repairs.  If they fail to make these payments and keep the house in good shape, the loan could be called and become due and payable in full.

These loans can be paid by a single payment, a regular monthly loan advance, or as a credit line or any combination of these payment plans. 

There are also public-sector loans offered by state and local governments but they generally must be used for specific purposes such as paying for home repairs or property taxes.  Reverse mortgages that are offered by financial institutions, on the other hand, can be used for any purpose.

The size of the mortgage loan from the private sector will depend upon the borrowers age, the value of the home and location, and the cost of the loan.  Not surprisingly, the most money can be borrowed by the older borrowers living in the most expensive homes on loans with the lowest costs.

The amount of the loan also depends on the reverse mortgage plan selected as the amount available can vary widely from program to program.  As a general rule, the largest amount available would come from the federally insured HECM described above.

Costs of Reverse Mortgages

State and local governments offer the lowest cost reverse mortgages, usually with low or no loan fees and typically low or moderate interest rates.  On the other hand, private sector reverse mortgages include a variety of costs.  Loan costs generally include an application fee that includes the cost of an appraisal and a credit report, an origination fee, closing costs, insurance, and a monthly servicing fee.  These costs probably can be paid with loan advances in which case they are added to the loan balance—interest is charged on all loan advances and because of the length of the loan, this amount can be considerably more than if the costs were paid at time of loan.

Reverse mortgages are most expensive in the early years of the loan, and then become less costly over time (remember the interest factor over time).  The cost can be very high in the short term, and is least costly if they live longer than their life expectancy.  The federally insured Home Equity Conversion Mortgage (HECM) is almost always the least expensive private sector reverse mortgage.

Those considering a private sector reverse mortgage should compare the overall cost with the HECM program, plus how much the loan is going to cost in fees, etc., “up front.”

The Effect of Reverse Mortgages on Taxes, Estates, and Public Benefits

Reverse mortgages may seem very attractive to those with large equity in a home but with little cash readily available, but reverse mortgages may have tax consequences, affect eligibility for assistance under Federal and State programs, and have an impact on the estate and heirs of the homeowner.

There can be some problem according to tax experts in how loan advances are treated for tax purposes.  Usually loan advances are not considered as income.  However, if the borrower receives SSI, Medicaid (read Medi-Cal) or other public benefits, then loan advances will probably be counted as liquid assets if they are kept in an account past the end of the calendar month in which they are received.  If they do keep them in this fashion, it is possible that they could lose their eligibility for SSI, Medicaid or other public benefit if their total liquid assets (for example, money in savings and checking accounts) are greater than these programs allow.

TAKING NO ACTION

Some people (maybe even most people) do nothing to prepare for the eventuality that they will become disabled and/or need long-term care in the belief that their children and other family members will be able to care for them.  This may be true in places like Hawaii, where family traditions about taking care of each other are very strong.  Some hope that they will never need long-term care, or if they do, it is a long time away when they may have the means to pay for it.  And there are always those who cannot qualify because of health problems, many because they just waited to long before they apply.  It must be agreed that LTCI is not for every person, otherwise a much larger percent of the population would be so insured.  However, an agent performs a service when they discuss the costs and the need for long-term care with individuals who otherwise may really not have thought about it, plus give them an opportunity to apply for coverage while they can.

Also, please see "The True Cost of Waiting" on page 242

OTHER OPTIONS

Savings and Private Out of Pocket Expenditures

According to the NAIC’s “Shoppers Guide To Long-Term Care Insurance,” approximately one-third of all nursing home expenses are paid out-of-pocket by individuals and their families.  Therefore, many people can pay for long-term care whether they can really afford it or not.

Senior citizens are aware that their income-producing years (as a general rule) are past, so they must now depend upon Social Security, annuities and pensions, and private investments.  Many have substantial amounts in passbook savings account and CDs, even with the low interest rates they draw in today’s market.  Some have IRA, 401(k)s and investments in stocks and bonds and similar investments.  The net worth of many elderly and retired persons could probably surprise (if not astonish) other family members and friends because as a general rule, seniors do not discuss their personal financial situation with others.  There are many with $500,000 or more, so meeting the needs of long-term care expenses would not probably be a problem.  Still, it would be fair to say that for most seniors, long-term care costs lasting for 2-3 years could be devastating and could deplete a lifetime of savings.

Even though there are many seniors who have more money than one would expect, conversely there are many that have incomes that fall below 125% of the recognized poverty level.  As anyone who has spent any time with seniors is very aware, the savings of many who worked hard for many years to get what they have, can disappear quickly due to expenses related to failing health, besides the usual inflation and other gradual increases in cost of living.  Unfortunately, with many the death of a spouse and the loss of the deceased party’s income, can make a difference between a comfortable retirement and “just getting by.”  Recent studies have shown that almost 16% of California seniors live precariously near the poverty line.  According to the National Council on Aging, long-term care expenses drive about 7 out of 10 senior families into federal poverty levels within four months of beginning institutionalized care.218

VIATICAL SETTLEMENTS

A Viatical settlement has the similar affect of accelerated or living benefits of a life insurance contract.  It is an agreement under which the owner of a life insurance policy sells the policy to another person in ex­change for a negotiated payment, which is generally less than the expected death benefit under the policy.  The purchaser continues to pay the premiums and upon the death of the insured, collects the death proceeds.  The advantage to the policyowner is that they are able to obtain an immediate payment while still living.  At one time, when this concept was first introduced, the largest class of policyholders to sell their policies through a viatical settlement was those who had been diagnosed with AIDS.  The purchase price is generally paid to the policyowner in a lump sum but may be paid in installments.  The policyowner may use the cash for medical (that was very important to those with AIDS) or other expenses.

The price viatical companies pay for a policy depends on the insured’s life expectancy and the cost of future premiums.  The National Association of Insurance Commissioners (NAIC) has adopted model guidelines for fair payment whereby insureds receive any­where from 50 percent to 80 percent of the policy’s face value.

Funds received by insureds under Accelerated benefits and Viatical settlements are given favorable tax treatment under HIPAA, and are not subject to federal taxes if the terminal or chronic illness is defined in a manner that meets the requirements of HIPAA.  California was one of the first states to treat these accelerated death benefits and viatical settlements as free from state taxes.  Other states are expected to follow the lead of HIPAA.

Annuities

Annuities were discussed earlier, but are mentioned again as they have been sold as alternatives to LTCI and aggressively sold by some agents as a substitute for LTCI insurance.  In the past some agents have informed purchasers that annuities will protect their assets from Medi-Cal "spend down" requirements.  In fact there is no such thing as a “Medi-Cal” annuity.  For more information on Medi-Cal, log onto: http://www.dhs.ca.gov/CPLTC or http://www.canhr.org

Annuities can be successfully used to provide funding for long-term care expenses, in particular those individuals who cannot qualify to purchase LTCI because of their age or health.  Because of the inappropriate sale of annuities, principally to the senior citizens, California requires all agents who sell annuities to take a specialized CE course in annuities.

Life Insurance with Long Term Care Insurance

Until recently, an insured could access a life insurance policy’s cash value while living only by taking a policy loan or surrendering the policy.  Many insurers now offer long-term care riders or living needs/accelerated benefits riders to their life insurance policies and annuities that allow the early payment of some portion of the face amount under certain situations.

It may be preferred by some to purchase a long-term care rider to a life insurance policy instead of LTCI because if the accelerated/living benefits are never used, the policy will pay the death benefit upon the death of the insured.  If these benefits are used, the face value of the policy will decrease accordingly, and upon the death of the insured, there may not be enough in insurance proceeds to meet the needs for which the life insurance policy was originally purchased.  However, many insureds are perfectly willing to accept such a reduction as they would personally derive benefit from the policy while they were still alive.

There are two types of long-term care riders for long-term care purposes.  (1) The long-term care rider is completely independent from the life insurance policy or annuity and the long-term care benefits paid to the insured will have no effect on the face amount of the life insurance policy or annuity.  (2) The other method is where the long-term care benefits are deducted from the face amount of the life insurance policy (or annuity) cash value that results in a corresponding reduction in both the face amount and the cash value. 

Life insurance long-term care riders provide benefits similar to LTCI benefits, with the big difference being the long-term care rider attached to life insurance policies is the method of determining the long-term care benefits which can be expressed as a specific daily benefit amount (e.g.,  $50, $100 or $150 per day) or as a percentage of the face amount of the life insurance policy, payable monthly, up to a specified maximum dollar amount.  There may be optional benefits for adult day care, inflation protection, hospice care and other types of care.

Living Needs Riders / Accelerated Death Benefits

Living Needs Riders /Accelerated Death Benefits relate to the life insurance benefits to generate life insurance policy loans to pay for long-term care expenses.  The “Living Needs” rider typically provides up to 70% to-80% of the policy’s death benefit to offset nursing home expenses, or up to 90%-to-95% of the death benefit for expenses incurred in connection with a terminal illness.  “Accelerated” payments can be made in a lump sum or in monthly installments over a specified period and the accelerated payment is subtracted from the death benefits payable to the beneficiary.

The riders state the method of determining the conditions under which benefits will be paid, and the insured will be eligible for long-term care benefits according to the provisions of the rider.  Benefits cease when the insured has received the specified percentage of the face amount allowed in the rider.  Otherwise, the living needs rider functions in much the same way as an individual LTCI policy.

If the insured becomes terminally ill, accelerated death benefits received under a life insurance contract are exempt from federal income tax.  This tax exclusion also pertains to any benefits received from the sale or assignment of any portion of the death benefit under a life insurance contract to a viatical settlement contract provider.

ALTERNATIVE LIVING SETTINGS OR ARRANGEMENTS

Retirement Homes

Typically, senior housing and retirement homes, are for people who want to live on their own without all the “hassle” associated with home-ownership, such as yard work, minor maintenance etc.  Senior housing is attractive for those who do not need assistance offered by assisted living facilities or nursing homes.

Very often these homes are rented apartments and many are designed specifically for the needs of older tenants, such as railings in bathrooms and stairs, electrical outlets located where stooping is not necessary, etc.  Many offer continual emergency call service, 24-hours a day, and some offer meals, transportation, social services, counseling, social activities and other such programs aimed at and appreciated by the senior population.

Congregate Housing/Independent Living Community

These types of housing communities provide a residential environment but with more shared common space and available service than fully independent living facilities.  Residents have their own apartments where they live independently and congregate housing includes central dining services and support services, such as transportation, social and recreational programs and housekeeping.

These communities offer similar services to those provided by Assisted Living/Personal Care commu­nities, but can be licensed by the State Department of Social Services, Community Care Licensing Division as Residential Care Facility for the Elderly (RCFE) or non-licensed offering limited services.

Residence of these types of communities usually need relatively little or no assistance with activities of daily living, therefore LTCI benefits would not be paid to someone living in one of these assisted living units.

However, some of these facilities will also have one or more buildings on site licensed as a RCF for those who need some custodial care.  If the person received assisted living services in a licensed RCF or RCFE, and met the coverage triggers on a LTCI policy, the policy would provide coverage.

FCongregate Housing—housing with a common living area and non-medical support services to meet basic needs of older people.

Regulation -Dept of Social Services, Community Care Licensing Division.

Payment-Grants provided through the Federal Government (Housing & Urban Development). Some funding through SSI/SSP for those eligible.

Continuing Care Retirement Communities (CCRC/LCC)

A continuing care retirement community provides a range of housing and health care options from independent living through 24-hour skilled nursing care and many also offer intermediate assisted living options.  Fee plans vary from a monthly fee arrangement to a combination entry fee/monthly fee, to an equity arrangement that requires the resident to purchase a housing unit or health package.

Continuing care retirement communities offer an innovative and independent lifestyle for single and married older adults.  This type of community is different from other housing and care options for older people because it offers a long-term contract that provides for housing, services and nursing care, usually all in one location.

The CCRC provides a familiar setting in which to meet the needs of their residents, (“aging in place”) as their increasing levels of care are provided for from within the community.  CCRC residents can take advantage of a wide variety of activities and services conveniently offered within the commu­nity.  There are no restrictions on lifestyle.  Residents can continue to travel, volunteer and enjoy life outside the community as much as they wish.  The CCRCs advertises emphasis on the individual, coupled with a supportive environment, which allows people to continue to pursue their  lifelong interests.

CCRCs, also known as Life Care Communities (LCCs), offer residential housing combined with personal and medical care.  As indicated in their promotions, they provide housing, recreational activities, and personal and medical care according to one’s needs, which can be in­creased as needs change.  The concept of “life care” suggests that all of their needs will be taken care of for as long as a person lives, but consumers need to be cautious when making commitments to these facilities.  Needless to say, these places can be expensive as high front-end investments and complex contractual agreements characterize CCRCs.  The admis­sion fee can range from $50,000 to $100,000, or more (sometimes much more).  There are usually additional monthly fees and sepa­rate charges for various types of services.

If the resident decides to leave the CCRC, exit requirements vary.  Sometimes the admission fee cannot be recovered or sold to another person if the original occu­pant decides to leave.  In other cases, a person might be permitted to resell their membership in the community, but for a greatly reduced value.  Many elderly people have difficulty understanding the contracts, however these are wealthier individuals and most of them have attorneys to help them with personal matters.  Hidden fees will appear sometimes in CCRC documents, but because of the class of person that they attract, any adverse publicity is stringently avoided.

These facilities often pre-sell before the facility is completed, and they may have a difficult time fulfilling their promises as to care, usually because the stall may not have the expertise or the manpower to do what they advertise.  Again, however, usually great care is taken so that such problems do not arise as not only do the type of person who are attracted to CCRCs wealthy, their personal attorney can do more than review admission papers!

Still, there have been occasions when a CCRC has gone bankrupt because of financial problems, leading to cutbacks of quantity and quality of services, and some of the residents found that they had to leave and find other accommodations and with none of their money returned from the CCRC.

Many of these facilities are reported to be very good while others do not seem to live up to their promises.  Since the track record of continuing care retirement communities has been uneven, anyone considering the purchase of a life care contract should carefully investigate the facility and would be wise to consult their attorney first, especially before laying out that amount of money. The American Association of Homes for the Aging (1-202-296-5960) may be contacted to determine whether a particular facility is accredited or not.

Fraternal and Religious Communities

The “life care” concept has also been adopted by some fraternal and religious organizations and they can offer some advantages in terms of social activities as residents usually share the same ethnic or religious culture or beliefs.  Usually the residents sign over all of their assets and home equity in exchange for lifetime care.  Various benefits are offered. These organizations frequently reserve the right to assess members for additional amounts when costs exceed the members’ financial resources.

Consumers should look into the level and quality of services available, cost structures and admission requirements, contract restrictions, and the organization’s financial condition, before enrolling or com­mitting to these communities.

 

STUDY QUESTIONS

 

1.  Medicare is an entitlement program and covers certain persons, including

      A.  those who are over 65 and eligible for Social Security Retirement benefits.

      B.  those whose income does not exceed 125% of the federal poverty level.

      C.  those who are on food stamps.

      D.  persons of any age who cannot afford medical care.

 

2.  Medicare has several requirements before they pay for nursing home care, including

      A.  the individual is receiving custodial and intermediate care.

      B.  the individual is receiving skilled medical care that can be provided also in the hospital.

      C.  the individual must not have been previously hospitalized for the condition for which they are being admitted to the nursing home.

      D.  The individual must have been previously hospitalized for at least 3 consecutive days and being admitted no more than 30 days after discharge from the hospital.

 

3.  In order for Medicare to pay for nursing home care the facility must be Medicare approved, which is

      A.  about 40% of SNF (skilled nursing facilities).

      B.  about ¾ of all SNFs.

      C.  all of the operating SNFs.

      D.  less than 5% of the SNFs.

4.  Medicare defines a beneficiary for home health care as being homebound if that beneficiary

      A.  lives alone.

      B.  does not have a car or other easily available transportation.

      C.  normally is unable to leave home unassisted and leaving requires a major effort.

      D.  does not travel outside of the city limits in which they reside.

 

5.  According to the Centers for Medicare and Medicaid Services, who keep track of these things, expenditures for home health care for the period of 1997 to 2002

      A.  increased an astonishing 25%.

      B.  actually decreased from $18 billion in 1997 to $10 billion in 2002.

      C.  remained level, as it has for the past 15 years.

      D.  fluctuated so dramatically that no sense can be made of the statistics.

 

6.  Standard health insurance plans, for long-term care pays

      A.  less than 1% of long-term care costs.

      B.  about 10% of long-term care costs nationally.

      C.  much more in California (8%) than in other states (5%) of long-term care costs.

      D.  nothing for long-term care.

 

7.  Under a Medicare Managed Care plan, services in the area of long-term care

      A.  are much more liberal than under the regular Medicare plan.

      B.  are about the same as Medicare & Medicare Supplement policies.

      C.  allow short-term nursing home coverage to be provided by any facility.

      D.  pay 100% of all nursing home costs for a period of 200 days.

 

8.  When Long Term Care Insurance is purchased, an insured who has family and friends who will volunteer to help with her care

      A.  must tell the family and friends that such care is not allowed, otherwise the LTCI policy will be voided.

      B.  can use their services to keep the costs down, so more LTCI funds will be available in case of more expensive care in the future.

      C.  should advise her friends to bill the LTCI company as certified homemakers and they will get paid.

      D.  should take as high a daily benefit as possible, as what is not spent can be given to her friends and family.

 

9.  The largest investment most Americans have is in their home, and in California

      A.  15% of those over age 65 have no mortgages.

      B.  80% of homes owned by those over age 65 are mortgage free.

      C.  only a very small percentage of residents over age 65 even own a home.

      D.  only 2% of those over age 75 own a home.

 

10.  If a homeowner is cash poor, there are three ways now to get cash out of a home: sell the house and move out; borrow against the house and make monthly loan repayments; or

      A.  give the house to charity provided the charity is willing to annuitize the payments.

      B.  a loan against the house that does not have to be repaid as long as the borrower lives in the house.

      C.  give the house to a family member and hope they will let the old owner live there.

      D.  lease it to a casino where gambling is legal and get payments “under the table.”

 

ANSWERS TO STUDY QUESTIONS

1A     2D     3A     4C     5B     6A     7B     8B     9B     10B

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