Doubly Enhanced Medicaid Partnership Annuities (DEMPANs): A New Tool for Providing Long Term Care to Retired U.S. Seniors in the Medicaid Penumbra

Abstract

A major problem facing many U.S. retirees is accessing and paying for long term care. The 2019 National Association of Insurance Commissioners (NAIC) guide on long-term care insurance estimates that, of the individuals living in the United States who reach age 65, about 70% are expected to need some form of long-term care at least once in their lifetime and about 35% are expected to enter a nursing home at least once in their lifetime. Although Medicare covers most of a U.S. retiree’s medical care, Medicare does not ordinarily pay for long-term care. U.S. retirees often can access long-term care services via the Medicaid program, which is a means-tested program geared to lower income Americans. But, to quickly qualify for Medicaid, many retirees take drastic steps, such as transferring their assets to family members. When access to long-term care is not urgent and long-term planning is an option, most U.S. states have developed so-called Partnership for Long-Term Care (PLTC) Program insurance policies that provide access to Medicaid services while sheltering some or all of a retiree’s assets. In this article, we propose a hybrid annuity product called a doubly enhanced Medicaid partnership annuity (DEMPAN) that combines an annuity with a long-term care rider that is integrated within the framework of a qualified partnership policy. (Outside the United States, bundled retirement products similar to DEMPANs are often called life-care annuities.) To analyze our DEMPANs, we use a multistate model of long-term care with health states that are based on a retiree’s ability to perform activities of daily living (ADLs) and instrumental activities of daily living (IADLs) and cognitive ability. A significant contribution of this article is to explicitly model how the quality of long-term care a retiree receives affects the retiree’s health state transition probabilities used in the multistate model. As higher quality of care usually comes at a higher cost but with better health outcomes, we provide an example that explores an expected discounted utility maximizing retiree’s optimal choice of DEMPAN. Our example showed that it may be optimal for retirees who purchase DEMPANs to simply buy average quality long-term care. We hope DEMPANs fill a gap in the long-term care market by providing an important tool for elder care planning for those in the Medicaid penumbra (i.e., in the middle- and lower-middle-income classes). Retirees who purchase DEMPANs have the benefits of an annuity, private long-term care, Medicaid assistance with paying their long-term care bills, and some degree of asset protection from Medicaid estate recovery.

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Notes

1 Outside the United States, bundled retirement products similar to DEMPANs are called life-care annuities (e.g., Murtaugh, Spillman, and Warshawsky 2001; Spillman, Murtaugh, and Warshawsky 2003; Pla-Porcel, Ventura-Marco, and Vidal-Melia 2017).

2 Instrumental activities of daily living are activities related to independent living, including preparing meals, managing transportation, managing finances, shopping for groceries and/or personal items, performing home cleaning and maintenance, and using a telephone.

3 However, for example, Harrington, et al. (2017) noted that nursing homes with high concentrations of minority residents tend to have more quality problems, are more likely to be located in the poorest counties, and have fewer nurses, lower occupancy rates, and more quality deficiencies. They also found that nonprofit nursing homes tend to have higher care quality than for-profit nursing homes.

4 A Medicaid-compliant annuity is an annuity that satisfies Medicaid rules for spending down assets without Medicaid penalties.

5 We assume other expenses are built into the mortality/morbidity rates and the interest rates used by the insurance company for pricing this DEMPAN product.

6 The implication of this assumption is that retirees can readily value complex instruments such as DEMPANs. However, it is well known that individuals have difficulty valuing life annuity streams (e.g., Ramsay and Oguledo 2018 for a review; J. R. Brown et al. 2021).

7 Without loss of generality, we will characterize our optimization problems as maximization problems rather than as minimization problems because, for any function $f:{\mathbb{R}}^n\to \mathbb{R},$ ${\max }_{x\in {\mathbb{R}}^n}f(x)=-{\min }_{x\in {\mathbb{R}}^n}(-f(x))$ and ${\min }_{x\in {\mathbb{R}}^n}f(x)=-{\max }_{x\in {\mathbb{R}}^n}(-f(x)).$

8 The bilateral monopoly problem is a well-known problem in economic theory; see, for example, Blair et al. (1989), who provided a review of the analysis of this problem.

9 If a retiree is focused solely on choosing the best DEMPAN, then we must define ${\widehat{\mathcal{E}}}_{\mathbf{c}}^{\mathrm{(}\text{ND}\mathrm{)}}$ to be the empty set; that is, ${\widehat{\mathcal{E}}}_{\mathbf{c}}^{\mathrm{(}\text{ND}\mathrm{)}}=\varnothing .$