The SeniorCare Investor: Health Care Reform & LTC--
Reform Won’t Impact Everyone The Same, But...
When the debates began in the most recent round of health care reform, we seem to remember that the primary goal was to reduce the number of uninsured, with some people believing that health care was a “right” that, much like public education for children, should be available to all (although perhaps not free like education is, but we all know where the money for public education comes from anyway). By having the entire population insured (at least the legal population, for now), it was believed that the two other goals of reform could be accomplished. These would be the removal of certain restrictions, such as pre-existing conditions, from coverage as well as the ability to finally get escalating costs under control. Unfortunately, the legislation that was signed into law last month went far beyond these relatively simple goals. It increased entitlement spending when we haven’t been able to figure out a way to pay for the existing programs that are already out of control and, from what we have been able to tell, it will do little to reign in health spending. There are unintended consequences for every action, and this one may be a doozey.
There are always two sides to every story, or at least two opinions, and views about the Community Living Assistance Services and Supports Act (CLASS Act) that was part of the recent legislation are an example. The CLASS Act is a new entitlement that allows participants to receive somewhere between $50 and $75 per day (not finalized yet, and will be constantly changing) for a variety of long-term care services, which can include the costs of a skilled nursing or assisted living facility, home health care services (from a family member or outside agency), adding amenities to your house to enable you to stay there longer and many others. All you need to qualify for the benefit is assistance with at least two activities of daily living. So, if you are in the elder care business, this sounds great, as it appears to provide flexibility for the consumer and should result in many new customers with money to spend on services as they age. We are sure that on March 23, someone, somewhere announced that it was a great day for the elderly in America. We beg to differ.
First of all, to participate (at least initially), you must be employed and have premiums deducted from your payroll for five years before you can receive any benefits (the vesting period). The benefits last forever once you qualify and we assume that once you start using them the premiums disappear since presumably you will not be working any longer (which is typical in the private long-term care insurance market). Although the premiums have not been set, it is expected that they will be somewhere between $100 and $150 per month in the form of a payroll tax. Because it is an “opt-out” program, when implemented everyone will have this tax deducted from their payroll until they opt out of the program, so we expect the premium revenue in the first month to be very high until workers discover what just hit their wallet, and they will be screaming for refunds. Even though we assume you will be able to opt out before implementation, a lot of employees will fall between the cracks initially, not to mention unscrupulous employers who might withhold the premium and never submit it to the government. At least there is no employer matching payment, as there is for Social Security and Medicare, but we suspect that will come in five to 10 years when the looming entitlement nation is looking for more revenues.
If you haven’t figured it, out one of the main problems with CLASS, at least for the first 10 years or so, is that most people who are subject to a payroll tax do not need the CLASS benefit (meaning they are relatively young), and those who do, or will need it in a few years, are already retired. Not to say that the “young” (age 25 to 65) should not have LTC insurance, it’s just that the cost of private insurance for many people would be one-half the CLASS premium and the benefit much better for a variety of reasons. The five-year vesting period is not common for private insurance policies, and this was obviously done to build up “reserves” for future policy pay-outs. So the “benefit” for the elderly is way off in the future, and that depends on how the benefit is paid for. And this is just one canard in the entire scheme.
It is bad enough that our elected officials are using the $70 billion in estimated premiums under CLASS in the first 10 years as one of the deficit-reduction measures to “pay” for health care reform. But the premiums that people will be paying for this future benefit will be going into the same type of “lock-box” that payroll deductions for Social Security have been going into for decades. In other words, they will be spent on other government programs, with the lock-box holding government bonds, representing IOUs of Uncle Sam which, in order to be redeemed, will need to be financed with yet more government borrowing. Any member of Congress who says that the money will be secure and waiting there for the beneficiary is remarkably naive at best, or very stupid at worst (we prefer other adjectives that are not printable). Just like there is no Social Security trust fund, there will be no CLASS trust fund overflowing with money to be spent on the needs, real as they may be, of the elderly. This is a classic Ponzi scheme and if it wasn’t perpetrated by the government, it would be considered illegal by that very same government. The Congressional Budget Office is estimating that by 2019 only 3.5% to 4.0% of those eligible will actually be enrolled, and many people consider that to be optimistic, and the real number closer to 2%. It has also been estimated that it will go bust sometime between 2020 and 2025 without higher premiums, mandated employer matches, smaller benefits or all three.
Another issue we have about CLASS is that too many people will believe they are covered for skilled nursing care with it, just like they often believe Medicare covers it. What happens after paying premiums for 20 years (if it lasts that long) and an 85-year old moves into a nursing facility? The benefit will only cover a third of the cost (at best), and the family will be wondering why. In addition, unlike the private insurance market, there will be no underwriting for CLASS, with all enrollees paying the same premium, so naturally it will eventually attract those most likely to be in need of the services as opposed to a healthier population. What does that do? Nothing but send the future costs through the roof. The only way to make it actuarially sound is to make it mandatory for everyone employed, young and old, and have the premiums truly invested (not in U.S. Treasuries) and not spent by another branch of the government. Given the direction of health care policy, taxation and the deficit, it is certainly possible that mandatory coverage would be on the horizon, but don’t count on the investment alternatives.
Speaking of taxation, I happen to have a “Cadillac” long-term care insurance policy, with premiums that have been about $50 a month for 10 years with a benefit that is (in today’s dollars) four times more than what would be available under CLASS, with an annual inflationary increase in benefit. Since there are some people who believe that Cadillac health insurance policies result in escalating use and costs and should be taxed, will my Cadillac policy be viewed the same way? Could that become a disincentive to plan for the future, resulting in being thrown into the CLASS fold in the future, broken or not, with higher premiums and lower benefits? Beware the unintended consequences.
So, some people believe CLASS is a great new benefit for the elderly population, others think it is a gimmick that will fail as Medicare and Social Security crumble under the weight of their collective trillions of dollars of unfunded liabilities. But what about the providers? As we stated, there is no impact for the next five years, since benefits can’t be paid out, and after that most likely very little since the vast majority of the initial people in the five-year vesting period will not be needing skilled nursing or assisted living facility services, and may not need at-home services either. In theory, if fully vested, it would be logical to think that CLASS could keep the elderly in their homes longer and out of “institutional” care settings. We all know that this is what most people want, but if this happens, the acuity levels of those eventually entering both skilled nursing and assisted living facilities down the road would likely rise, which would result in even shorter lengths of stay, higher turnover and higher costs funded by…who knows?
As we stated, the original goal of health care reform was to sharply reduce the number of people without health insurance. Although this will be accomplished with the legislation, about 50% of the newly “insured” will be enrolled in Medicaid. Gee, thanks. Perhaps if our congressmen were enrolled in Medicaid for a year they might seek a different alternative, but we know the likelihood of that. The number of primary care physicians taking on Medicaid patients continues to dwindle, and hospitals are not entirely thrilled about the Medicaid payment rates either. Medicaid has been the budget buster for most states for many years, especially now when Medicaid rolls have been growing because of the economy while tax receipts have been declining. Ask any governor if they want to see more Medicaid enrollees, and you know what the answer is. For skilled nursing providers, any additional pressure on Medicaid budgets is only going to mean one thing: less money available for them in the future as their patients move in sicker and more frail. Or, more elderly could seek the assisted living alternative, where available under Medicaid waiver programs, unless they pick a facility operated by a national company that decides to ask you to move out.
A short eight years ago, the so-called Medicare Trust Fund was projected to hit insolvency in 28 years, just as the last of the baby boomers would have passed the age of 65. By 2009, insolvency was just eight years away. The new Medicare taxes on higher incomes and unearned income with health care reform may help, but they will be spent on other things and since there is no such thing as a trust fund anyway, who are we fooling? The point is that if skilled nursing providers think there is pressure on Medicare reimbursement today, it is not going to get any better. Reform has delayed the implementation of the new reimbursement system called RUGs IV, which increases the number of diagnostic categories from 53 to 66 (among other things), until October 1, 2011, with some people thinking this is positive and others believing that delaying it will just confuse lenders, investors and providers. However, the elimination of the “look-back” provision for services provided in the previous 72 hours before admission to a SNF as well as concurrent therapy remain in the legislation. The former probably will result in more patients in the future being admitted with lower RUGs classifications (thus, lower reimbursement), and the latter will decrease the utilization (efficiency) of the therapists, neither of which is good for skilled nursing providers.
Health care reform is also bringing a host of new disclosure rules for skilled nursing owners and operators. The “additional disclosable parties” include lessees, sub-lessees, 5% or more owners of the real estate, anyone who provides management or financial services, anyone in the organizational structure and on and on. We assume this is meant to also capture the sub, sub, sub, sub-lessees that we have seen in some structures designed, we suspect, with the intent to frustrate lawyers who want to litigate against a company with perceived deep pockets, if they can ever find them. This may result in a plaintiff’s bar bonanza because it could make it much easier to identify the ultimate ownership and take them to court.
In addition, since many providers have more than 50 employees, they will now be faced (at least in the future) with the additional cost of providing the full-time employees with health insurance or pay the per-employee penalty, if they don’t already provide coverage. This is a real cost and probably will not result in higher reimbursement rates to cover it (probably not?). Now, if an entity is set up with dozens of corporations each with less than 50 employees, then it would theoretically be able to get around the new rule. That potential loophole, however, would be plugged very quickly, so this is going to be a very burdensome cost to those providers not already paying for health insurance. The “hidden” cost is going to be complying with all the new regulations and disclosures, and that will be difficult to estimate.
Despite what Nancy Pelosi says, this health reform legislation is going to result in an increase in the deficit, an increase in taxes, an increase in health spending and then another increase in taxes to deal with the rising deficit. Instead of 2,500 pages which even she admitted she had no idea what was included in them (remember the statement, “let’s pass the bill and then find out what’s inside”), we prefer the KISS method (keep it simple, stupid). Remember, the two primary goals were to significantly decrease the number of people without health insurance and to help reign in costs. But 2,500 pages later—and let’s not forget the part about the government takeover of college tuition funding (that’s right, education reform)—we have an overly complicated set of rules, mandates, taxes and penalties that will be difficult, and expensive, to enforce. And we don’t see much benefit to any senior care providers at this point in time. And just to give you that warm and fuzzy feeling about the government’s growing role in the economy, we will leave you with a recent statement from the U.S. Government Accountability Office. On February 26, the GAO stated that it “could not render an opinion on the consolidated financial statements of the federal government (other than the Statement of Social Insurance) because of widespread material internal control weaknesses and other limitations” (emphasis is ours). Is it troubling that public company CEOs are held to a higher standard than our own federal government, and subject to prosecution? It would be hard to make this stuff up. Stay tuned for our next audio conference on health care reform and LTC, slated to air on Thursday, May 13.Click here to read more about this audio conference.