Viewpoints

Healthcare – A Nightmare For Boomers

Jack Capron

Originally Published In:
October 2007
Author: Jack B. Capron, CPA, ESQ, PFS

You want some frightening statistics and observations:

• Over 50% of individuals born in this country between 1946 and 1964 (“Boomers”) that reach age 65 will require long term care.  For this purpose, long-term care is care provided at home or in a nursing home facility (other than a hospital) to provide disabled individuals with reasonable life style comforts.  This would include providing meals, bathing, bathroom assistance, and related basic needs. 
  
• Boomers have fewer children to care for them or relatives willing to take on the responsibility – many are living away at great distances. And individuals are living much longer. Some 35% of men and 50% of women will live to age 85.
  
• Over 60% of Boomers ages 50 to 64 have been diagnosed with one or more chronic health conditions such as heart problems, mobility issues or cancer.
  
• Approximately 10% have no healthcare insurance or are underinsured.
  
• Medicare, the primary source of government provided hospital coverage, does not become available for most Boomers until they reach age 65.
  
• Medicaid, a source of government assistance for many who planned in advance for potential nursing home care, has been substantially changed to restrict access, and in many cases will not be available.
  
• The average cost of nursing home care in a semi-private room in 2006 exceeded  $175 per day.

The Federal Government has been wrestling with the health care dilemma for decades. Many approaches have been proposed, more are being studied and considered.  However, there is no clear comprehensive and responsible solution in sight. 

Here is a potential scenario:

Mr. Sicklot, a 59 year old retiree has a stroke and is hospitalized.  At retirement his employer subsidized health insurance coverage terminated.   Unable to acquire “affordable” health insurance he decided to depend on his retirement savings, Medicare and Medicaid.  After several weeks in the hospital and a number of procedures Mr. Sicklot returns home with $70,000 in medical bills.  His paralysis requires him to have constant assistance, which is substantially provided by his caring wife. 

His wife is taken ill and dies requiring him to be placed in a nursing home.  Medicare is not available because he is under 65 and not in a hospital.  He cannot apply for Medicaid because he is not yet classified as poor enough to meet the financial criteria.  The annual estimated cost of care in the nursing home including medications and related costs is $84,000.  At that rate his life savings will be depleted in 4 years. 
This is the dilemma no one wants to find themselves in.  Yet many will and others have to determine how to avoid such a nightmare.  Let’s look at some of the planning options.

Long Term Care Insurance

Historically, long term care insurance policies have not received rave reviews from consumers. However, as the industry has matured, policy options have proliferated, pricing has stabilizes to a greater extent and products are improving in response to consumer critics and market demands.

As with any insurance purchase, comparing products can be challenging, and sound professional guidance should be sought out as part of the process. 
Tailoring a policy to fit your needs is critical.   You need to ask these questions, among others:

• Do I qualify for coverage? Your age and current health could disqualify you.
  
• What benefits are provided under the policy and at what cost? Most policies provide a daily benefit after a waiting period.  For example, the policy may cover nursing home costs up to $200 per day after 90 days in the facility.
  
• How long will the coverage last?  Some policies will pay benefits for 3 or 6 years or for life.
  
• Are premiums waived once you enter a facility or after a waiting period?
  
• Does the policy provide for care at home?
  
• Are there premium discounts if both you and your spouse purchase insurance?
  
• What is excluded from coverage under the policy?
  
• Do my premium payments provide me with any tax benefits?

Medicare and Medicaid

The two primary government provided programs for medical assistance are Medicare and Medicaid.

Individuals who have attained the age of 65 are automatically eligible for Medicare coverage.  This program covers certain hospital, doctor and related costs while admitted to the hospital; and for up to 100 days following discharge, if specific conditions are met.  If a patient goes home from the hospital and later requires nursing home care Medicare will not provide facility coverage.  Medicare Part D will pay for a portion of outpatient prescription drugs through private plans (note that plan members will still need to pay premiums and co-pays). 

Unlike Medicare, which allows for automatic eligibility at age 65, Medicaid is a means-tested program.  Only individuals with limited financial resources qualify.  In the past, in order to qualify under the program, many individuals transferred assets to family members over a period of years while in good health.  In their later years, if they were admitted to a nursing home, the previously transferred assets would not deprive them of Medicaid benefits. The direct impact of the Deficit Reduction Act of 2005 (“DRA”) signed into law on February 8, 2006 is to make it much harder for individuals to protect any assets if they need to receive assistance under the Medicaid program.  The purpose of the Medicaid provisions of the DRA was to reduce the Medicaid rolls, forcing individuals to seek other alternatives to pay for long-term health care. 

A discussion of the new law changes illustrates the point. 

Under prior law the “look back period” for determining financial eligibility was generally 36 months.  The “look back period” is important because it may identify asset transfers that, if made for less than fair market value, create a period of ineligibility.

For example, if Mr. Sicklot had transferred  $21,000 in 2005 to grandchildren to pay college tuition costs he would be ineligible for Medicaid for the number of months the gifted amount would pay for care in a nursing home.  At a cost of $7000 per month, the ineligibility period would be 3 months from the date of transfer.   Under the new law, the period of ineligibility starts on the date when Mr. Sicklot applies for Medicaid.  In addition, DRA changes the “look back period” extending it to 60 months from the former 36 months.  Therefore, unless Mr. Sicklot waits more than 60 months for the look back period to expire, even if he otherwise qualifies for Medicaid, he will be ineligible for 3 months following his application.

Planning Today

Recent legislation and related changes by policy makers and private insurers have created a sea-change in planning options.  The laws may continue to evolve but it is unlikely health care costs will decline or health care concerns will go away.

Consequently, planning alternatives need to be explored and existing plans need to be revisited to insure they are right for the times.  Individuals can save and invest for these contingencies, plan many years in advance to transfer assets to avoid the punitive DRA provisions, or look to (or revisit) insurance products to meet their needs.  Since the choices may be staggering, professional assistance may be a particularly good investment. Designing the right kind of protection is critical.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.