Long Term Care Costs and Insurance

Note: This material was prepared by an Arizona law firm relying primarily on Arizona law. While much of the material will also apply to other states' laws, you should consult a lawyer in your locality for more specific information.]

Statisticians calculate that nearly half of all Americans who turn 65 in any given year will eventually enter a nursing home. While a majority of those nursing home admissions will be for a short term (less than a year), about a quarter will stay at least one year.

Many elderly Americans who do not enter a nursing home will nonetheless require long-term care. Some will be cared for in their own home with the help of aides, and some will enter adult care homes, assisted living facilities or other settings less expensive and less medically-oriented than nursing homes.

For all of these, cost is a major concern. Typically, nursing home costs in Tucson begin at about $4,500 per month. Adult care homes are usually less expensive, with a range from as low as $2,000 or $2,500 per month to more than some of the less-expensive nursing homes.

  1. Medicare and Medigap Policies
    Although many Medicare recipients believe that most nursing costs will be covered by Medicare (and any Supplemental coverage the Medicare recipient may have purchased), the truth is that little relief can be expected from this source. Medicare covers only a limited period of "skilled" nursing care (usually for rehabilitative purposes, as when therapy is expected to restore substantial physical function), and Medigap policies cover only the Medicare deductibles and co-payments.

    Nearly half of the total national cost of nursing home care is paid by the federal Medicaid program. This compares to the small fraction (less than 5%) paid by Medicare.

  2. Medicaid
    Arizona has its own Medicaid program, called the Arizona Health Care Cost Containment System (AHCCCS). The Arizona Long Term Care System (ALTCS), AHCCCS' long-term care component, has rules very much like Medicaid long-term care programs in other states, and is subject to the same federal guidelines and restrictions.

    ALTCS is not an insurance program, and therefore is not based on contributions by participants. This program is subsidized by federal general tax dollars, and is intended to provide medical care to the poor and medically needy. Consequently, the eligibility requirements for ALTCS are both stringent and complex. After establishing citizenship and residency, the ALTCS applicant must meet eligibility standards in each of three additional areas:

    1. Medical eligibility
      The applicant must be determined (by ALTCS staff and rules) to actually require institutional care. This is in addition to any determination by the applicant's attending physician, though the ALTCS staff will usually look to the same information relied upon by the patient's physician.

    2. Asset eligibility
      A single applicant may not have more than $2,000 in "available" resources. Excluded from this calculation are the residence of the applicant (provided that the residence is valued under $500,000 and the applicant intends to return home at some future date), the applicant's vehicle, household furnishings, personal belongings, and an irrevocable prepaid burial plan or a small amount which may be set aside in a separate account to provide funeral and burial expenses. The rules for a married couple are much more complex, with a special calculation used to determine how much in assets they are allowed to keep.  This calculation depends on a number of factors, including the setting in which each spouse resides.  In general, if the applicant's spouse is not residing in a skilled nursing facility, the couple may have between about $22,000 and $110,000 in "available" resources and still qualify for the program.  In addition, a couple is permitted to have the excluded assets listed above.

      It is important to understand that assets which have been given away (or sold for less than fair market value) can cause a penalty and a subsequent delay in eligibility for the program.  At the time of application, the applicant must disclose all such transfers within the last five years.  In other words, the worst possible course of action is the one most commonly undertaken - transfer of the applicant's assets to immediate family members at the first prospect of nursing home admission.

      Because the rules are different (and much more lenient) for married couples, many of the planning opportunities are only available to such couples. Both married and single applicants, however, may benefit from transferring available assets (such as bank accounts and other liquid holdings) into exempt assets (primarily home and automobile). This may be accomplished by, for instance, paying off an existing home mortgage, though other issues should be taken into consideration prior to the use of this planning method.

    3. Income eligibility
      A single applicant may not have total monthly income (including all sources of income) in excess of $2,022 (2010 figure), which number changes annually with the cost of living.  Married couples are permitted to have double that ($4,044) per month, although special rules exist when only one spouse is applying.  If an applicant is found to be over the income limit a special trust, called a Miller Trust, or an Income Cap Trust, can be prepared in order to allow for income eligibility.

      Because of the restrictive ALTCS eligibility rules, the frequent concern about quality of care and the fear of financial catastrophe, many of our clients seek to make arrangements to provide for potential long-term care needs. Short of accumulating substantial personal wealth, the most common approach is to consider long term care insurance.

  3. Long Term Care Insurance
    Most long term care policies pay a fixed benefit for each day spent in the nursing home. Some policies also cover nursing care provided in the home; few cover any portion of adult care home or other alternative living arrangements. Like other insurance, long term care policies usually include a deductible or elimination period (the first 30, 60 or 90 days during which there is no coverage) and a pre-existing condition exclusion.

    A short (and far from exhaustive) list of the most common concerns about individual long term care policies includes:

    1. Level of care
      The policy should cover skilled, intermediate and custodial care. Home care is usually considered an important coverage, but may dramatically affect the price of a given policy. Avoid policies which are restricted to payment for Medicare-approved facilities.

    2. Conditions
      In addition to careful review of the pre-existing conditions language, pay particular attention to the description of conditions covered by the policy. Any policy which excludes Alzheimer's Disease, senility, organic brain syndromes or other conditions described with similar language will have very limited usefulness.

    3. Benefit rate and inflation protection
      Benefit rates are usually expressed in increments of $10 per day of coverage. Present nursing home rates in Tucson are approximately $100 per day or more; inadequate coverage may be worse than no coverage at all. For the past few years, nursing home rates have increased faster than the general cost of living (or inflation) rates, so inflation protection is an important consideration.

    4. Maximum benefit
      Many policies have a maximum benefit, expressed in terms of either total dollars or length of time. Such a policy may still make good sense, especially if coupled with a plan to divest the patient of assets at the beginning of the coverage period (providing coverage for the five-year disqualification period for ALTCS described above).

    5. Level premium
      A premium which increases automatically over time may be attractive in the first years of the policy, but may make the coverage unaffordable precisely when it is most needed.

    6. "Activities of daily living"
      Most policies begin to provide coverage when the policyholder is unable to perform a certain number of "activities of daily living" (usually two or three of five). A policy including more possible activities of daily living (especially bathing, which experts say is typically the first ability to be lost) is preferable to a more restrictive policy.

    7. Life Insurance
      Many policies now include an element of life insurance. Sometimes, for example, any unused portion of the long term care policy will be used to provide a life insurance benefit of up to the amount of long term care coverage. While life insurance may be an appropriate purchase, such policies will require the applicant to pass a physical examination. The addition of life insurance benefits will also increase the premium cost for such a policy.

    8. Summary
      The long term care insurance industry is relatively young, and the policies presently being offered are mostly new products. Consequently, the marketplace is rapidly changing and unsettled. The best recourse for the concerned buyer is to read extensively, comparison shop and review actual policies and promotional literature.
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