Facing Facts Alert 14

Volume II, Number 2, February 19, 1996

Facing Facts Alert 14

The Truth about Entitlements and the Budget
A Fax Alert from The Concord Coalition
Volume II, Number 2, February 19, 1996


On February 6, the National Governors' Association announced a Medicaid
reform package that opinion makers promptly hailed as a budget
icebreaker.  It would keep Medicaid an individual entitlement as the
White House insists.  But it would give the states broad  budgetary
discretion in controlling costs as the GOP insists.  Perfect
compromise, right?

Perfect cover-up is more like it. If Medicaid were just a poverty
program, its "entitlement" status might have little fiscal
consequence.  But it's not. The biggest problem looming over Medicaid
is the exploding cost of nursing home care and this goes increasingly
to middle- and upper-income seniors. The White House insists on a
Medicaid entitlement precisely because it wants to recast Medicaid as a
middle-class property right perhaps as a prelude to another universal
health-care plan, at least as a popular vote-getter.  As for Congress,
it's foolish to think that its ability to say no to welfare mothers
means that it can say no to the middle class.

Fiscal hawks face a choice. They can wink as Medicaid is transformed
into a vast middle-class estate preservation program. Or they can tell
America the truth. They can tell most Americans not to expect
government to pay for their long-term care and tell most families they
will have to plan, save, insure, and pool resources on their own. For
family-value Republicans, it's an opportunity to show how these values
start at home.

A Middle-Class Entitlement

Let's start with some facts about Medicaid, the means-tested
health-benefit program that is jointly financed by the states and the
federal government.  Media accounts of Medicaid mills conjure up the
underclass.  But this is an incomplete image.  Although the majority of
Medicaid beneficiaries (roughly 70 percent) are poor children or AFDC
moms, most of the benefit dollars (roughly 70 percent) go to the
elderly and the permanently disabled, primarily for nursing home care.

Seniors must meet a means test before collecting Medicaid.  The basic
rule is that personal "resources" cannot exceed a stringent
state-determined threshold, usually $2,000.  But this too is
misleading.  The test is riddled with loopholes allowing seniors to
qualify, for example, while exempting any "spousal assets" up to around
$70,000, any personal assets that have been annuitized, and any primary
residence (plus land, furnishings, and automobile) no matter how

If there are still problems qualifying, seniors can transfer assets to
their children and rest assured (no matter what the regulations say)
that states won't go after them.  Lawyers specializing in "elderlaw"
the fastest-growing legal service of the 1990s stand ready to explain
the trusts and asset-shuffling that make it all work.  Says long-term
care expert (and former HHS Inspector General) Stephen Moses,
"Virtually anyone, regardless of income or assets, can qualify for
nursing home care paid for by the government within 30 days."

There is no way to tell what share of nursing home residents receive
Medicaid through subterfuge.  But the numbers tell a startling story.
Among Americans age 65 and over, only 12 percent are below the official
poverty lineand even fewer, less than 7 percent, receive means-tested
cash assistance under the SSI program. Of households headed by persons
over age 75, three-fifths own their own home and car and half have a
net worth of over $75,000.  Yet Medicaid is the principal payer for 63
percent of all nursing-home patient days.  On entering nursing homes,
over half of all seniors get a Medicaid subsidy from day one.

It is often said that the only reason so many nursing home residents
end up on Medicaid is that they have first been forced to "spend down"
their assets as private-pay patients. While this may once have been
common, seniors who destitute themselves paying nursing home bills are
now the exception.  According to the CBO, as few as 10 percent of
Medicaid nursing home patients become eligible in this way.  And even
these cases are mostly due to inadvertence or uninformed financial

The coming age wave makes the gentrification of Medicaid
unsustainable.  From now to 2030, the number of elderly age 85 and over
is projected to triple or quadruple.  The nursing home population can
be expected to rise at least as fast as the "old old" population and
may rise much faster.  For one thing, there is evidence that the
incidence of disability among the old old is rising.  For another, the
sociodemographic factors that put seniors at risk for
institutionalization all point in an ominous direction: the rising
likelihood of being divorced or widowed, of living alone or far from
one's children, of not having any children at all, or of having
children who are themselves elderly and disabled.

Which Values?

The administration's response to this gathering crisis  is to protest
that a change in Medicaid's entitlement status would "violate our
values."  Which values?  Not the conviction that the social safety net
should be inviolate: Last fall, the President was willing to cancel the
entitlement to AFDC. And not the principle that "earned" benefits are
sacrosanct.  While FICA contributions furnish a fig-leaf defense for
Social Security and Medicare, there's no earned right to Medicaid.
Apparently, the administration believes the middle class is entitled to
whatever it has come to expect from government.  As President Clinton
put it before the White House Conference on Aging last May: "I hope
that if nothing else comes out of this conference, the American people
will come to understand that Medicaid is not simply a program for poor
people."  To fan voter passions against the GOP plan to block grant
Medicaid, he shrewdly borrows GOP thunder and warns of  "Medicaid
police" with vast powers to raid your home and seize your property.
The White House is beating the Republican leadership at its own game:
It has discovered that the more voters hate government, the more they
insist on taking from government.

On paper, the GOP plan would hold federal Medicaid expenditures to 1.3
percent of GDP in 2002, 1.1 percent of GDP in 2010, and 0.8 percent of
GDP in 2030 cuts 28, 58, and 78 percent beneath current projections.
The pretense is that the caps can be met by herding the welfare poor
into managed care.  The reality as President Clinton correctly implies
is that  even coming close to these targets would require wholesale
changes in Medicaid's nursing home coverage.

Cuts of this magnitude prove that the GOP does not share the White
House vision of a New Deal for Suburbia.  The GOP, however, does not
drop the other shoe and tell the middle class what it will have to give
up.  Until political leaders do so, cost control in Medicaid will be a
sham.  In time, the public will grow sick of this "poverty program"
hypocrisy and demand that Medicaid be turned into an explicit
entitlement for everyone.

A Framework for Reform

Reform must begin with the recognition that an entitlement guarantee to
Medicaid is a bad idea not because the poor shouldn't have a safety
net, but because it's not the poor who are being entitled.  In fact,
without the guarantee, we will be able to deliver better care to those
among the elderly who must rely on public budgets.

How?  By tailoring care to the needs of individual families.  That may
mean institutional care for one, "assisted living" for another, and
"home care" for yet another.  Such flexibility is unaffordable within
an entitlement framework that gives a blank check to everyone.  All
experts agree that such home-care flexibility, by making Medicaid more
attractive, would induce vast new demand.  Consider: Only 20 percent of
all elderly with disabilities currently reside in nursing homes.

Determining eligibility and type of care should be left up to the
states.  When it comes to long-term care, both medical and financial
need demand administrative discretion.  Keep in mind that the social
norms defining government's role in caring for the frail elderly differ
widely by region.  Such differences, not relative affluence,  explain
the gross inequality in Medicaid spending from state to state.  New
York now spends nearly $2,000 on long-term care for seniors per
resident age 65 and over, while Minnesota spends $1,000, California and
Texas spend under $500, and Utah spends around $300.

States should also be given wide latitude to determine to what extent
adult children can be held financially responsible for the care of
their parents.  To categorically exempt children is to disarm the
regulations against asset transfers and therefore to render an
effective means-test impossible. Everyone agrees it's bad policy to
make dependent children wards of the state without first trying to get
parents to live up to their responsibilities. But what about the
dependent parents of grown children? Why not talk about "deadbeat

Some say an entitlement to long-term care is essential because families
aren't preparing for the eventuality themselves.  This is backwards:
Families aren't preparing because they know that government will be
there.  Experts agree this is why few seniors purchase private
long-term care insurance.  Lawyers and tax consultants point out that
it's usually grown children who get seniors to divest and qualify for
Medicaid; they want their inheritance intact. If Medicaid were no
longer an option, families would work out other arrangements.

Long before the age wave hits, Medicaid will have to be restructured.
White House pronouncements irresponsibly deny the obvious and delay
middle-class families from doing what they must to prepare. The
reluctance of fiscal hawks in both parties to talk honestly about the
issue only makes matters worse.


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