Tightening Medicaid Rules May Not Lead to Greater LTC Insurance Purchases

It is sometimes claimed that reducing the amount of assets an individual can keep while qualifying for Medicaid would increase the purchase of private long-term care insurance coverage. 

Now, two professors of economics have estimated that tightening Medicaid asset rules would do little to encourage the purchase of long-term care insurance policies.  

Although Medicaid recipients may keep only about $2,000 in assets in most states, their spouses may retain between $22,728 and $113,640, depending on their particular state.  The minimum and maximum are determined by federal law but individual states’ limits may set their own limits within these parameters.  

In an article published in the Fall 2011 issue of the Journal of Economic Perspectives, Jeffrey R. Brown of the University of Illinois and Amy Finkelstein of the Massachusetts Institute of Technology estimate that a $10,000 decrease in the level of assets an individual and their spouse can keep while qualifying for Medicaid would increase private long-term care insurance coverage by 1.1 percentage points.

“To put this in perspective,” they write, “if every state in the country moved from their current Medicaid asset eligibility requirements to the most stringent Medicaid eligibility requirements allowed by federal law, this would decrease average household assets protected from Medicaid by about $25,000. This, in turn, would increase the demand for private long-term care insurance by only 2.7 percentage points. While this represents a large increase in insurance coverage relative to the baseline ownership rate, the vast majority of households would still find it unattractive to purchase private insurance.”

Overall, Brown and Finkelstein are pessimistic about the prospects for encouraging more Americans to buy long-term care insurance unless Medicaid is completely restructured or done away with altogether.  They note that long-term care insurance is a poor deal, particularly for men, who get back only about 33 cents on the premium dollar they spend, and that for a 65-year-old man of average wealth, 60 percent of the private insurance benefits would have been paid by Medicaid.   

But the authors say that even if the implicit Medicaid “tax” on long-term care insurance were eliminated, “other factors could still prevent the market for long-term care insurance from developing.”  These factors include the availability of informal insurance provided by family members, the liquid assets in the home serving as a “buffer stock of assets,” and the difficulty many individuals have in “making decisions about long-term, probabilistic outcomes.”

To read the article, “Insuring Long-Term Care in the United States,” click here.

For a commentary on the article in Forbes magazine, click here.

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