Given the substantial costs of caring for a person with a long-term illness, there is general agreement among financial planners and other professionals that financial and estate planning should include a careful analysis of Medicare, Medicaid, and long term-care insurance options. These options may be confusing to even the most sophisticated client.

Limited Government Benefits for Long Term Care

Medicare and Medicaid are government-administered health insurance programs. While most of America's nursing home care is paid for by Medicaid, Medicare does not pay for the kind of chronic care underwritten by long term-care insurance offered through private sector, for-profit insurance companies. Medicare pays for medical treatment--period. Medicaid pays for medical treatment as well as long term care in both community and institutional settings. Medicaid eligibility is means-tested, and benefits are limited.

Medicare

All qualified working Americans over age 65 receive Medicare Part A benefits (hospitalization) based on Federal Insurance Contributions Act (FICA) contributions made during their working days. Medicare is also available to qualified individuals who become disabled prior to retirement. Medicare A covers acute illnesses and accidents that require skilled medical care in a hospital, as well as subsequent rehabilitation when full or partial recovery is a plausible goal. Medicare Part B, which pays for outpatient medical and mental health services as well as some durable medical equipment, is obtained on an elective basis. Medicare beneficiaries may also supplement their coverage with a Medigap policy or by qualifying for Medicaid in the community.

Medicare provides very limited coverage for chronic, nonrehabilitative, custodial health servicesÑthe kind of basic services needed by those who become unable to perform the so-called "activities of daily living" (bathing, feeding, dressing, walking/transfers, continence, and toileting). Medicare will pay for a maximum of 100 days of rehabilitation in either a rehabilitation hospital or skilled nursing facility with a qualified rehabilitation program. A daily deductible applies after the twentieth day. Beneficiaries should understand that this 100-day allotment is not guaranteed, but is contingent on reasonable rehabilitative progress as determined by the facility's rehab team.

Medicaid

Medicaid is state-administered health insurance for impoverished individuals. Medicaid does provide some coverage for nonacute custodial healthcare services. Only persons who meet strict income and asset limits can qualify for long term-care benefits under Medicaid. Transferring assets to qualify can result in disqualification for a period of time following the gift, as well as gift-tax liability for the transferor. A qualified elder-law attorney should be consulted regarding pre-Medicaid asset transfers that are specifically designed to qualify for state nursing home assistance. While Medicaid laws are complex, the basic rule to keep in mind is that in determining eligibility, the government is allowed to "look back" for at least three years at asset transfers to individuals and five years at the establishment of trusts. The government can consider the value of those transferred assets in determining Medicaid eligibility. If assists are not divested strategically in advance of filing an application for Medicaid benefits, individuals must "spend down" assets (pay for their own care) before qualifying for Medicaid benefits. States can attach assets, including placing a lien on a home, to recoup any monies Medicaid has paid out for your care.

The Private Long-Term Care Insurance Option

Long term-care insurance has become extremely popular in recent years, particularly since the advent of the Health Insurance Portability and Accountability Act (HIPAA), which became federal law on January 1, 1997. HIPAA introduced tax-qualified long term-care insurance that provides some deductibility of premiums, tax-free benefits, and standardized triggers for collection of disability benefits. Generally, use of these private sector policies is triggered by either cognitive impairment or inability to perform, without substantial assistance for over 90 days, two or more of six basic activities of daily living, including bathing, feeding, dressing, transferring (eg, bed to chair), continence, and toileting.

Long term-care insurance policies include (1) stand-alone policies; (2) chronic- and terminal-illness riders on cash value life insurance policies; and (3) universal life insurance policies with specially designed long term-care features (not available in all states).

Long term-care policies are not appropriate for everyone due to the premium costs. Careful analysis should be made to determine whether a family has sufficient assets to warrant purchase of individual coverage. If assets are very modest and the cost of premiums would significantly reduce your standard of living, it might make more sense to "spend down."

Many middle class families can benefit from having long term-care coverage in place. The purchase of long term-care insurance can prevent an insured individual from having to impoverish themselves by giving away homes, savings, and their last bit of independence to qualify for Medicaid's minimal coverage and care.

Caution should be observed when purchasing a long term-care insurance policy. Generally speaking, persons with a net worth of $300,000 to $3 million are candidates, although a good rule of thumb is not to budget more than 5%-7% of annual income for policy premiums. Most good carriers offer "guaranteed renewable" plans (premiums are level for life and can be cancelled only upon a default in paying the premium) with adequate inflation riders (5% simple or compound adjustment on an annual basis). Once a premium rate has been set, an insurer cannot increase the rate. It can only raise rates on groups of policies in an entire state.

Many plans are based on legally married spouses applying together (and obtaining 10%-20% discounts). Benefit periods should be at least 3 years, but 4, 6, 10, and lifetime plans are available. A recent development in the market are policies fully paid up in 10 or 20 years or at Age 65. The premiums are considerably more expensive but many carriers then convert the policies to "non-cancelable" status and the premiums cannot be raised, even by class.

To reduce annual premiums to acceptable levels, some people opt to "self-insure" for a portion of projected long term-care benefits. For example, in New York current daily costs of long term care are as much as $350, but many residents feel that the cost of insuring this entire amount is prohibitive. Alternatively, a long term-care policy can be built around a daily (initial) benefit of $200 per day with the additional $100-$150 differential being covered through other (relatively liquid) assets of the insured. In this manner, the insured covers the catastrophic downside risk but maintains reasonable premiums. Other forms of self-insurance within a long term-care policy include lengthening the front-end waiting period by 90 days, and downgrading from compound to simple inflation protection.

The insured person is well advised to structure a long term-care policy with home-care or community-care benefits that are equal to nursing-home benefits. It is also important to choose an insurance carrier that has significant assets, a reputation for good service, and a strong track record for paying claims.

Advance riders can include restoration of benefits, dual waiver of premiums for spouses, shared care benefits, and other useful (but more expensive) features. Another recent development in the market is the increased willingness by carriers to consider domestic partners as the equivalent of spouses, in certain cases and in certain states.

Conclusion

A periodic review of personal retirement and estate plans is advisable. Individual wishes regarding assets and care are properly spelled out and communicated to loved ones. Make sure that the proper documents are in a place to allow the smooth transfer of assets to chosen loved ones. Patients should ask themselves: Have I updated my will? Have I executed a trust to avoid probate, if appropriate? Do I have a power of attorney, living will, and healthcare proxy in place to ensure someone can handle my finances and healthcare decisions if I become too ill to do so? Are my assets significant enough that estate-tax reduction and long term-care planning are needed?

Above all else, individuals reviewing their estate planning and long term-care options should consult with knowledgeable professional advisors who can help review their estate planning documents, explain complex tax and property laws, and compare insurance coverage, including reviewing various companies, policy structures, advanced riders, and payment modes.

Robert G. McDermott, JD, CFP, is an Attorney and Certified Financial Planner (CFP) in private practice, with emphasis on business, estate and financial planning, wills and trusts, and litigation matters. He is admitted to practice before the New York, Connecticut, and Federal Courts, and is an Adjunct Professor at St John's University in New York, where he received his undergraduate and law degrees.

Joseph A. Jackson, LICSW, CCM, is author of Health Care Without Medicare: A New Practice Manual for Community-Based Care Management. He is President of ElderCare Advisors, Inc., a care planning and care management company serving western New England and eastern New York (on the web at <www.eldercareadvisors.com>). Mr. Jackson offers training and consulting services for healthcare organizations seeking to improve community-based care-management services. He is a Licensed Independent Clinical Social Worker, a Certified Case Manager, and a member of the National Association of Social Workers and the National Association of Professional Geriatric Care Managers.