How To Fix Medicaid’s Long-Term Services Program

Reforming this program will cut government spending while still helping low-income Americans

Needed reform. Medicaid’s Long-Term Services and Supports program subsidizes care for many middle-class individuals, often at the expense of lower-income recipients. Image Credit: Halfpoint Images/Getty Images

Government debt is growing at an alarming rate, necessitating measures to curb spending. Together Social Security, Medicare and Medicaid account for 41.7% of federal expenditures, and with spending cuts being a clear priority of the new administration, reforming these programs is essential. President Trump has said that Social Security and Medicare are off limits for spending cuts—perhaps because cutting those programs would be extremely unpopular with voters—but he has left the door open for reductions in Medicaid.

A critical area for reform is Medicaid’s Long Term Services and Supports (LTSS) program, which is meant to help low-income Americans who need long-term medical care. In practice, it subsidizes care for many middle-class individuals, often at the expense of lower-income recipients.

Bad Incentives

Broadly speaking, the term “long-term services and supports” encompasses “the broad range of paid and unpaid medical and personal care services that assist with activities of daily living (such as eating, bathing and dressing) and instrumental activities of daily living (such as preparing meals, managing medication and housekeeping).” A recent study estimated that 70% of adults age 65 and over “develop severe LTSS needs before they die and 48% receive some paid care over their lifetime.” Those who do not receive paid care generally rely on care from family members.

Medicaid funds the majority of long-term services and supports expenses in the U.S.—58% of total spending on LTSS in 2022—though only 6% of Medicaid recipients use these services. This small fraction of recipients accounts for 34% of total Medicaid costs. But despite these large expenditures, many recipients are not well cared for. For example, Medicaid pays nursing homes only about 70% of private pay rates, discouraging high-quality facilities from admitting Medicaid patients. Consequently, those reliant on Medicaid often receive lower-quality care.

The alternative is private long-term care insurance. Although it is expensive, by one estimate most Americans could afford to purchase a plan that would enable them to cover the costs of any long-term services and supports they might need if they bought the plan before turning 55. But only a very small percentage of older Americans own long-term care insurance, largely because they know Medicaid will reimburse their long-term care expenses.

Anyone with assets and income below a certain level can qualify for Medicaid to pay for long-term care expenses. The program is meant to help the neediest Americans, but in practice many middle- and upper-income people also benefit. When wealthier individuals need long-term care, they can reduce asset holdings until they are below the level required to qualify for Medicaid. This option may seem nonsensical—would the Medicaid benefits really outweigh the costs of spending down their income and getting rid of all their assets?

In fact, however, it is possible to qualify for Medicaid without spending down all one’s assets. In most states, the value of countable assets a single person owns cannot exceed $2,000 to qualify for Medicaid, but many kinds of assets are excluded from this calculation. Home furnishings and appliances, personal items, prepaid funeral expenses, one automobile and home equity are exempt, although most states place an upper limit of $730,000 on the value of exempt home equity.

Additionally, a married person can qualify for Medicaid LTSS while exempting a substantial quantity of assets and income that can be used for the monthly maintenance needs of a surviving spouse. Other options for shielding assets are also available, such as transferring them to heirs, provided that is done more than five years before applying for Medicaid. Furthermore, some states do not carefully enforce asset limits for those applying for LTSS.

Consider Betty, who, several years after she retires, begins to experience symptoms of dementia. Her family concludes that, eventually, she will be unable to perform activities of daily living and will need some kind of long-term care. What is the best way to pay for that care? Betty has accumulated enough of a nest egg that she could pay for care for several years. And if she sells her home or takes out a reverse mortgage on it, she could extend that time for a few more years.

But Betty would like to keep most of her wealth rather than spending thousands of dollars of her own money for care over an extended period. She seeks legal counsel and determines that rather than selling assets to pay for her care, she can rely largely on Medicaid if she uses her liquid assets to buy a new car, home furnishings and other personal items. If she still has wealth left over after buying exempt assets, she can give it as a gift to her heirs, provided she does so at least five years before applying for Medicaid.

This example demonstrates that the Medicaid LTSS program ends up helping middle- and upper-income individuals more than low-income Americans. Those who can pay out of pocket for some long-term care expenses have more and better-quality options than those who are entirely dependent on Medicaid. And because of all the ways to protect assets, wealthier individuals can opt to pay for a short period of long-term care and then switch to Medicaid. Once they are admitted to a particular nursing home—and because of their wealth, it can be a top-quality, expensive one—they can usually stay, even after they switch to Medicaid.

As the baby boomers turn 85 beginning in 2031, the demand for long-term care will rise substantially. Thus, it becomes more urgent to reform Medicaid LTSS so that it helps only those who are truly needy and cannot afford long-term care insurance. Along with changing the rules to limit Medicaid eligibility, some reforms may be needed to enhance the accessibility and affordability of long-term care insurance for those with moderate levels of income and wealth.

A Reform Proposal

The purpose of reform is to get those who can afford it to provide for their own long-term care by some combination of paying directly for it or purchasing insurance, rather than going through Medicaid. Giving people enough of an incentive to do this will require eliminating all the loopholes that enable those with middle incomes and higher to qualify for Medicaid. This would involve disallowing all the asset exemptions, such as home equity, for which they are currently eligible. It would also involve increasing the look-back period for asset transfers beyond the current five years. Various other currently lawful schemes and loopholes for retaining ownership of assets while qualifying for Medicaid, such as Medicaid Asset Protection Trusts and Medicaid Compliant Annuities, should also be eliminated.

People should be encouraged to plan and prepare for long-term care expenses long before those expenses are necessary. One way to structure the reforms described above would be to phase them in, perhaps initially applying them only to people younger than a specified age, such as 55. This would give people time to pay the full cost of long-term care insurance before they need to receive any of the care it covers.

Besides making it harder for those with wealth to qualify for Medicaid, the government could provide tax credits proportional to the amount of long-term care insurance a person buys, with the amount of the credit declining with increased wealth. Employers could also be encouraged to offer long-term care coverage as a fringe benefit long before workers are thinking about retiring. The annual cost of long-term care insurance is about one-tenth as large at age 40 as at age 79.

An alternative to these reforms would be instituting a mandatory system of social insurance. Everyone could be required to pay a tax to cover the expected cost of long-term care that an average American would need. If everyone had to pay, the per capita cost would likely be lower than the cost for those who would have chosen to purchase coverage privately, since these people would probably be less healthy than average. But such an approach has two important flaws. First, it reduces people’s incentives to care for their health in a way that minimizes the cost and risk of long-term care. Private insurance, by contrast, offers lower rates to those with fewer health problems. Second, as with Social Security, policymakers would be inclined to promise more benefits than they could afford to pay with the revenue collected from a long-term care tax.

It's better to focus on reforms that leave the decision of how to plan and provide for the risk of long-term care expenses up to each person. To be able to implement reforms that are effective in reducing Medicaid spending while also better helping those who are truly needy, it may be necessary to change the Medicaid funding formula. If states manage the program but the federal government continues to bear most of the cost, state administrators will have insufficient incentive to control costs.

This problem could be mitigated by reducing the share of expenses covered by the federal government and replacing grants that vary according to state spending with fixed grants that are unaffected by state government decisions about Medicaid spending. The higher the share of each additional dollar spent on Medicaid that is paid by the state government, the greater the incentive for states to enforce rules that limit Medicaid spending.

Effective Medicaid LTSS reform requires a balanced approach that reduces government expenditures while maintaining access to quality care for the truly needy. Eliminating loopholes, promoting private insurance participation, and realigning state and federal cost-sharing incentives can create a more sustainable system. While politically challenging to achieve, such reforms would encourage personal responsibility and financial planning, ultimately enhancing the well-being of many Americans.