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The Medicare and Medicaid Minefield

Learn how to create a clear path for clients and their long-term care needs

As the population ages and life expectancy rises, so does the likelihood that more people will be needing long-term care and your clients should know the hard facts about paying for it, because the costs can be staggering.

The expense of living in a nursing home averages $61,685 a year, according to the American Association of Retired Persons, while a daily home health aide visit can easily cost 60 percent to 80 percent of that figure over the same period and, whatever the care, one-third to one-half of all seniors will eventually need some.

Many clients will not want to spend their hard-earned assets on long-term care, nor will they even want to pay for LTC insurance because they tend to think relatives, like their children, grandchildren or Uncle Sam, will take care of them. After all, they may reason, they took care of their children and paid their taxes to support Medicaid and Medicare, the two federal programs designed to help people who need it. Now it is their turn to be on the receiving end.

Their expectations, however, may be unrealistic and they might have no one to turn to except themselves. Adult children and grandchildren are often unable to help because they live far away and, even if they are close by, they all may be too busy working. As for Medicare and Medicaid, neither program is designed for the kind of people that are well off enough to afford your services.

The Medicare Myth

Medicare is a poor source of long-term care benefits and coverage. In fact, the insurance-licensed rep who suggests that clients count on Medicare to pay for the first 100 days of nursing-home care risks should be sued. Why? Because Medicare provides very limited coverage — only paying for about 5 percent of all long-term care costs. Moreover, it's difficult to obtain even that limited coverage.

Medicare covers just two types of long-term care — hospice and skilled care in a nursing home. Yet, most people who don't need skilled care — just custodial care, which provides help with the activities of daily living, not nurse- or physician-rendered care.

To qualify for skilled care coverage, your client would first have to spend a full three days and nights (72 hours) in the hospital and have a medical professional prescribe continuing skilled medical care in a nursing home.

Yet, even many seniors who have difficulty taking care of themselves, like those recovering from hip replacement surgery, will not meet Medicare standards coverage. First, the hospital stay will likely be less than 72 hours and, second, the care needed is custodial rather than skilled. The same applies to follow-on care for strokes, heart surgeries and so forth.

The Medicaid Dilemma

If you and your clients are interested in preserving accumulated wealth and assets, applying for Medicaid is unlikely to be of much help in securing long-term care either.

The government generally wants people to spend their own money first. There are ways to avoid it but that takes some long-term planning and your clients may still not like the results.

One popular method is establishing an irrevocable trust. It can't, however, appear to be a dodge. It has to be established long before there is need for long-term care (three to five years). The government won't provide Medicaid coverage if it decides that your client only established the trust because the need for long-term care was imminent and your client wanted the government to pay for it.

Assets protected in a trust, though, may not be what your clients want after all. They may not like the actions of the trustees, and that's too bad, because once assets are placed in an irrevocable trust they may be difficult or impossible to get back.

A house is one asset that won't stop any of your clients from qualifying for Medicaid long-term coverage, but only if they have a spouse living in it. Should that person enter a nursing home or die, the government may take the house and sell it to recoup its Medicaid costs. That could be a major problem if one of the spouses recovers enough to go home again.

Still, even the best-laid plans that help your client avoid liquidating assets to pay for long-term care is no guarantee of Medicaid coverage. According to a study from Georgetown University, about 50 percent of people who make plans to avoid using their own money to pay for nursing-home expenses have their Medicaid nursing-home applications denied.

The Ethics

Ethics is a major issue for all professional advisors. If your client doesn't want to purchase LTC insurance and doesn't want to use personal assets to pay for long-term care expenses, should you recommend “Medicaid planning” as a way to pay the bill and preserve the children's inheritance?

Medicaid planning focuses on taking actions that will result in Medicaid paying for long-term care of the wealthy. Those actions may not be what your client really wants, and the coverage and limitations of Medicaid may not be what they expect. (Do you want a roommate who is not your spouse?) Poor long-term care planning can cause assets to evaporate. Too often, clients (and reps) don't understand the limitations of Medicare and Medicaid. Moreover, poor planning can totally undermine asset-preservation and accumulation strategies.

And the Reality

Counting on government resources and legal maneuvers to pay for long-term care is risky. Your clients want to preserve their assets and protect their freedom of choice. They are counting on you to help them make the right choices. For many of your wealthier clients, and even the upper middle-income ones, Medicare and Medicaid are not going to provide the solution. That's why now can be the right time to explain to your aging clients all the benefits of LTC insurance.

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