Return to Virginia Business - May 2004

Carol Mullins has been one of the lucky ones. The 245-bed Annaburg Manor nursing home she runs in Manassas managed a 5 percent profit in 2002, a year when more than a third of nursing homes in Virginia lost money. And many of those that did nose into the black just barely did so.

The culprit that dogs nursing homes across the state is the state’s anemic Medicaid program for elderly, disabled or low-income residents. Nearly two-thirds of the residents at Annaburg are on Medicaid, and reimbursement of $110 per day paid to Annaburg is less than the cost of providing care. So the nursing home’s profits came thanks to the non-Medicaid patients, who pay $170 per day.

Virginia’s Medicaid reimbursement rates are notoriously stingy. “We have traditionally been in the range of 45th to 50th in reimbursements,” says Stephen Morrisette, president of the Virginia Health Care Association (VHCA), the Richmond-based membership organization for nearly 250 nursing and assisted living facilities in the state. That’s not likely to improve, given the state’s budget woes.

Even without expanding the program’s scope, the costs associated with Medicaid long-term care are expected to rise to about $900 million by 2006, up from nearly $714 million last year. Administrators like Mullins have a far more modest hope: “We don’t want them to make cuts,” she says.

While the strain is felt most acutely today in nursing homes, there’s an inherent warning to business owners and employees seeking to retire here: start weaving your own safety net for long-term care. Today, 53 percent of people over age 65 receive long-term care, ranging from at-home care to living in a nursing home. It’s not cheap: five years of long-term care, covering two years of home-based care, one year in an assisted living facility and two final years in a nursing home in the Richmond area carries a $173,000 tab. In Northern Virginia, the same care would top $200,000.

In Virginia, to qualify for Medicaid, you have to be either very sick or very poor. Single people must spend down their assets (excluding one car) to $2,000. If one married spouse goes into a nursing home, the remaining spouse can keep only half the assets, up to about $92,000. “You could be saving for retirement in the most conservative fashion,” says Bob Kristofak, senior vice president and director of the employee benefits division at Hilb Rogal & Hobbs Virginia, the Glen Allen-based insurance brokerage firm. “But if you’re not covering yourself on the long-term care end, that nice nest egg could all be lost quickly.”

One option for protecting assets and helping with the nursing home bills is long-term care insurance. While it has been around for nearly 20 years, it’s just now gaining traction as a huge bulk of the baby boom generation nears retirement. Jodi Anatole, vice president of the long-term care division at MetLife in New York, one of the leading providers of long-term care insurance, says that in 2003 just 5,800 employers nationwide offered a long-term care insurance option. About 1.7 million people are currently covered by an employee-sponsored plan, she says.

Unlike many other insurance offerings, employers are typically offering long-term care insurance options, but they’re not paying for it. Currently, long-term life insurance by law cannot be offered in a cafeteria-type, pre-tax benefits plan. Those employers that choose to pay any portion of the employees’ premiums, however, can deduct those costs as business expenses.

Even if employees pick up the entire tab, they still have an advantage when buying insurance through their company, Anatole says. “The employer is doing the due diligence. With long-term care products being so complicated, that’s a valuable thing,” she says. MetLife doesn’t train company human-resource teams to sell the insurance option because the offering is so complicated. Instead, MetLife contacts employees through direct mail, email or web-based notifications and offers online decision support tools, like cost and premium calculators as well as a telephone help line. Even so, “The employer does the homework up front and stays involved, and has oversight over the program. That’s an added level of protection” for employees, she says.

Kristofak of HRH says that among Virginia-based companies, interest in long-term care insurance offerings is growing slowly for a variety of reasons. Long-term care insurance, just like long-term care itself, isn’t cheap. A 45-year-old could expect to pay around a $300 monthly premium for a $150-a-day benefit. “There’s a general lack of understanding in the employee population about what it costs to go into a nursing home,” Kristofak says. If employers showed those numbers, the interest might be higher, he says.

Steve Hamant, a financial advisor with Richmond-based Raymond James Financial, says several of his smaller business clients are paying premiums for key employees. Hamant says he always talks about the costs of long-term care when developing financial plans or doing retirement planning. “I tell my clients in their 40s and 50s that if they develop some type of long-term care fund — whether it’s insurance or self-funded — that once they’ve done that, they can have peace of mind about their retirement funding.” He came up with that presentation after hearing older clients, nearing retirement, fret that they can’t spend their retirement savings as they had hoped to because of the fear of needing long-term care one day.

MetLife’s Anatole expects that long-term care insurance participation rates will continue to climb, especially if the plans gain favorable tax credits. “The politicians are recognizing that state Medicaid budgets are in serious trouble.”

In the meantime, Virginia’s nursing homes continue feeling the pinch. In 2002, according to data collected by Virginia Health Information, a nonprofit health data organization in Richmond, nursing facilities in the state reported a median profit margin of 1.37 percent. “Most businesses that operate at less than a 4 percent margin don’t stay in business,” says VHCA’s Morrisette. “We’re operating very efficiently in Virginia. You can’t get much more efficient.”

Look past the balance sheet, however, and a rather bleak picture emerges. Because of Virginia’s strict medical needs requirement, people wait longer to enter nursing homes. That has made the state’s nursing home population among the most frail in the nation. Only Hawaii and South Carolina had a nursing facility population that was more dependent on help for such daily activities as bathing, dressing and eating, according to a December study by the American Health Care Association.

The state gets half of its annual $3.6 billion in Medicaid money directly from the federal government. Twenty percent, or nearly $714 million, goes to long-term care. If the legislature were to decide to expand Medicaid coverage, the federal government would continue to match the state’s expenditures. But that’s unlikely to happen for now, says Morrisette. “Somewhere back in the deep distant past, they made the decision to hold down costs by restricting eligibility. Now, they can’t even pay for the restricted eligibility.”

With each financial squeeze comes the risk that care will be compromised. Labor makes up the bulk of nursing home expenses, yet nursing home wages for the certified nursing assistants (CNAs) are barely above minimum wage. Nursing aides and attendants in Virginia earned a median $9.04 per hour in 2002, according to the Bureau of Labor Statistics. As a result, turnover is high: among certified nursing assistants in Virginia in 2002 turnover was a whopping 73 percent, with more than 900 estimated openings vacant. This revolving staff door is not only unsettling to patients; it also creates the added expense of recruiting and training new employees.

“When there’s a nursing shortage, salaries go up,” says Mary Blunt, president of Sentara Life Care, which operates seven nursing centers in the Tidewater area and North Carolina. “Salaries are the single largest expense we have.” To help stem turnover, Sentara recently launched a program to certify “advanced” CNAs. The first six graduates finished the 120-hour classroom and skills training program in February. They can look forward to higher pay, promotions and greater responsibilities, Blunt says.

With baby boomers starting to think about retirement and in many cases, having some experience with long-term care for parents, the issue is taking on a greater urgency. “The majority of current taxpayers are not seniors. Unless people have a personal experience with long-term care, the tendency to support it is not there,” says Sentara’s Blunt. While that’s a frustration it hardly leaves her hopeless. “If we didn’t have hope, we’d all be closed.”

Return to Virginia Business - May 2004