As large Medicaid cuts loom, states look to convert life insurance polices to long term care benefits to fill the financial gap

As the debate over how to balance the budget and whether to raise our nation’s debt ceiling rages on in Washington DC, we are seeing clearly that one of the fattest targets on the radar screen is Medicaid. Our nation’s Governors from both parties spoke out during the National Governor’s Association (NGA) annual meeting held in July and said they are “most worried that both President Obama and Congressional Republicans wanted to cut Medicaid payments to the states by $100 billion over the next decade.” House Republicans have taken things even further proposing more than $700 billion in Medicaid cuts, largely by converting federal funds into block grants for states. “There has been an unsettling silence around Medicaid — even from members of my own party,” said Sen. Jay Rockefeller (D-WV). “Medicaid suddenly looks like the sacrificial lamb.”

Medicaid is the primary payor of long term care services in the United States. Over 10 million Americans now require long term care annually, and in 2009 Medicaid spent $240 billion on long term care services accounting for 43% of total expenditures. By comparison, $45.6 billion or19% of long term care services was paid “out of pocket” by the consumer. States spent on average 16% of their annual budgets on Medicaid making it the second biggest budget item behind only education.

Medicaid and 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. There is a combined budget shortfall of $121 billion across 46 states for fiscal year 2011. States are legally required to operate with balanced budgets every year, and draconian cuts as well as federal assistance have become necessary. Although Medicaid cuts were not part of the Federal budget and deficit ceiling compromise agreement (for now), on August 1, 2011 CMS enacted an unprecedented across the board reduction in LTC reimbursements from Medicare and Medicaid of 11.1% for 2012.

To keep pace with these paralyzing budget problems and growing demand for long term care services, states have begun looking for alternative ways to stimulate private dollars to help pay for the costs of long term care and reduce the pressure on Medicaid budgets. One example has been the unanimous passage by the National Conference of Insurance Legislators (NCOIL) of the Life Insurance Consumer Disclosure Model Law requiring that life insurance companies inform policy owners they have a number of options to consider instead of abandoning an in-force policy. Among the options in the law is the right to “convert a life insurance policy into a long term care benefit plan”.

Any form of life insurance can qualify for a policy conversion to pay directly for the costs of long term care in a nursing home, assisted living and home healthcare. Life Insurance is an unqualified asset for Medicaid eligibility and the Assurance Benefit policy conversion is considered a “qualified spend down”. This option also allows the owner to preserve a portion of the death benefit throughout the spend down period, protecting it from Medicaid Recovery legal action against the estate.

Sources

Kaiser Family Foundation, Medicaid Fact Sheet, March 2011 and State Fiscal Condition and Medicaid Report, October 2010

National Conference of Insurance Legislators (NCOIL), Life Insurance Consumer Disclosure Model Law, November 2010