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Mary and Bob Smith's Story
Mary, age 62, and Bob, age 65, have worked hard helping their only child through college and are now looking forward to living the life of empty nesters. They have tried to do everything fight in funding their child's education, setting aside a $10,000 emergency fund, prepaying funeral expenses, paying off both vehicles, accumulating $200,000 in CDs from the sale of Bob's business, and purchasing a home that now has $200,000 in equity and a small mortgage. Bob just retired and has an income of $1,200 per month from his company retirement plan and receives Social Security retirement benefits of $953 per month. At age 65, Bob became eligible for Medicare and also purchased a Medicare Supplement (Medigap) Policy. Mary is employed and earns $1,500 per month and is covered by a group health insurance policy provided by her employer. The Smiths want to leave their home to their only child, Bob Jr., who plans someday to live in his childhood home and raise his own family. A month after retirement, Bob suffered a massive stroke, was hospitalized for a week, and then was moved to a skilled nursing facility for rehabilitation. After 60 days in the nursing facility, Bob's condition stabilized. Given the severity of his condition, he will need to remain in a nursing home for the remainder of his life. How will the Smiths survive this personal and financial crisis? What resources and insurance coverages do the Smiths have that cover these costs? How do the Smiths provide for themselves and still leave a legacy to their child?
What Kind of Care Does Bob Need and Does Medicare Cover It?
Unfortunately, most Americans believe that they are adequately covered for the type of care that Bob needs. They believe that Medicare (the federal government health care program for individuals 65 or older), a Medicare Supplement (Medigap) Policy (a policy purchased from an insurer to supplement coverage under Medicare), and/or private individual or group medical expense insurance covers situations such as Bob's required long-term care. However, Bob needs substantial assistance with "activities of daily living (ADLs)," and most Americans (including Bob) are not adequately insured for those needs. ADLs include bathing, dressing, transferring (moving to and from a bed to a chair), toileting, remaining continent, and feeding oneself. This type of care (sometimes referred to as personal or custodial care) is not covered by Medicare, Bob's Medigap policy, or Bob's private health insurance.
Only A Small Portion of the Cost of Bob's Care Is Covered. Even though Bob's primary need is for long-term assistance with ADLs, Medicare does provide coverage for his initial six-day hospital stay, subject to a $1,068 deductible and a $135 deductible and 20 percent co-pay for physician's services. Since Bob's hospital stay was at least three days in length, and he was admitted into a skilled nursing facility within 30 days of his discharge, Medicare will pay for up to 100 days of his care as long as he needs some element of skilled care. Medicare pays for the first 20 days of care without a co-payment by Bob, but Bob must then pay a $133.50 daily co-pay. However, because Bob's condition stabilized after 60 days in the skilled nursing facility, Medicare will no longer pay for his care since he now needs daily assistance with ADLs, and not acute medical care. (Acute care, which is covered by Medicare, Medigap policies, and private health insurance, is care which is needed to improve a patient's condition, including rehabilitative services, or to keep a patient's condition from deteriorating. Once the patient stabilizes and his or her main care need is assistance with ADLs, a long-term care policy is needed to provide coverage.) Even though Bob's policy that supplements his Medicare coverage (his Medigap policy) may cover the deductibles and co-pays required by Bob during his hospital stay, and a portion of his skilled nursing facility stay, his Medigap policy, like Medicare, will not cover his long-term care needs.
How Do the Smiths Cover the Costs of Bob's Long-Term Care Needs?
Bob and Mary have three possible choices to cover Bob's long-term care needs: 1) cover the costs "out of pocket;" 2) spend down assets and income to qualify for Medicaid; and/or 3) rely on coverage from a long-term care insurance policy.
Covering Long-Term Care Costs Out of Pocket. Since Medicare (and Bob's Medigap policy) will not cover Bob's long-term care nursing home costs, Bob and Mary could attempt to cover the costs through personal and/or family resources. However, Bob's needs are expected to be long-term and permanent. Since Mary hopes to remain in the family home, has limited income herself, and has no access to other family resources, Bob's and Mary's personal resources are somewhat limited. Assuming Bob's cost of care is about $60,000 a year, and that Mary needs her $1,500 monthly income to cover the small mortgage and her living expenses, the Smiths' emergency fund of $10,000 will be depleted in a couple of months, and their $200,000 will be depleted in a little over three years. The Smiths may consider a reverse mortgage to use the equity in their home to pay the required costs; however, they really want to leave their home to their son, who has always planned to raise his family there. A reverse mortgage would require the Smiths to give up ownership of the home once they die and would not provide them with the opportunity to leave the family home to their son. Bob's retirement annuity of $1,200 per month and his Social Security retirement benefit of $953 per month will fall short of his anticipated nursing home costs by approximately $3,000 per month. (According to state regulators, the average private pay rate at nursing homes in Montana was $5,125.50 per month as of September 2008.) How do the Smiths cover the costs out of pocket? They don't, especially when Bob's stay turns out to be extended and when Bob needs institutional care.
Medicaid Coverage of Long-Term Care. Medicaid (the federal/state aid program for a number of groups, including those age 65 or older who meet asset and income guidelines) will cover Bob's long-term care needs once he expends his resources (assets) to the required levels.
On the asset side, both Mary's and Bob's assets (resources) are included, and Bob must exhaust the countable resources so they are at or below $2,000. The couple's combined resources will be evaluated, and Mary will be allowed to retain half of their resources up to a maximum of $109,560 (2009 level), and Bob will be allowed an additional and separate $2,000. Once the couple's combined countable resources are below a total of Mary's half plus Bob's $2,000, Bob will be resource-eligible for Medicaid. Fortunately, there are a number of resources that are excluded from the calculation. In Bob's case, the family home (and home furnishings), their vehicle with the highest equity value, and Bob's prepaid funeral arrangement are not counted as resources. In the Smiths' case, Bob will have to use over $100,000 of his countable assets (which include his bank CD and emergency fund) for his care needs in order to qualify for Medicaid, and Mary will be able to retain the other half for her support. And, even though the $200,000 of equity in the family home is not counted as a resource in order for Bob to qualify for benefits, Medicaid will seek to recover the costs of care expended on Bob's behalf from the home when Mary dies.
For Medicaid qualification on the income side, Mary's income is not counted for determining Bob's qualification for Medicaid. However, Bob would be expected each month to contribute his income to cover his long-term care costs to the level of his monthly personal allowance of $50. In arriving at that figure, Bob would be permitted to cover any health insurance premiums and make a contribution of a portion of his income to Mary. (The amount of Bob's income allowance that may go to Mary is a function of Mary's income level and minimums established by Medicaid.) After allowances, the balance of Bob's income each month must be used to cover his nursing home costs before Medicaid will cover any remaining costs incurred during the month. And, when Bob and Mary eventually die, state Medicaid authorities are required by federal law to recover from the Smiths' estates any costs expended by Medicaid for Bob's care.
Long-Term Care Insurance. Another option for the Smiths that may have helped them keep their home and their bank CDs and pass those assets to their son would have been long-term care insurance. First arriving on the scene in 1987, and with more than 9 million policies sold to date, long-term care insurance is designed to cover the type of care (help with ADLs) that Bob needs. And, according to LIMRA International, 98.8 percent of all long-term care policies sold today are tax-qualified, which means that premiums are deductible and benefits are income tax-free, subject to IRS limits. A tax-qualified long-term care insurance policy may have been perfectly suited for Bob, who has suffered a massive stroke and needs assistance with several ADLs. One of the main benefit triggers for a tax-qualified long-term care policy is that the insured is expected to need "substantial" assistance with at least two of six ADLs for a period of at least 90 days. The other trigger found in these policies is "severe cognitive impairment which requires substantial supervision." The severe cognitive impairment trigger is well suited for advanced Alzheimer's patients, where, according to a Society of Actuaries November 2007 study, Alzheimer's was the number one claims producer, followed by strokes. Fortunately, Alzheimer's is required to be covered by long-term care policies under both Montana law and the federal Health Insurance Portability and Accountably Act (HIPAA).
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