BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESSWEEK INVESTOR

Nursing Homes Don't Have to Break You
Planning now can help preserve your savings

No one relishes the thought of living in a nursing home. Yet as the average life span lengthens and more people become frail or suffer from a chronic illness, the more likely it is that you, your spouse, a parent, or another relative will have to pay for nursing-home care sometime in the future.

Last year the U.S. General Accounting Office reported that nearly 40% of people age 65 now are likely to spend some time in a nursing home. About half of them will stay less than six months, and 20% will spend five years there. The cost of such care is expensive and rising. A recent national survey of 435 nursing homes by the MetLife Mature Market Institute estimates the average cost of a year's stay in a nursing home to be $55,000, or $153 a day. In major metropolitan areas like New York City, the top nursing homes charge more than $300 a day.

The big question, then, is this: If you or a family member needs a nursing home, how will you pay for it? The first step is to reckon with the issue in your financial planning. ''Ninety percent of the people I see come to me in a crisis,'' says Mary Moorhead, an elder-care specialist. ''If they came to me several years before, we could plan the money out, maybe put some aside. But if they need 24-hour care and there's no answer but a nursing home, we look at how much money they have and how long it will last.''

MEDICARE LIMITS. Begin the planning by evaluating both the potential need for nursing-home care and financial resources. If you have a chronic illness or a family history of severe medical problems, you should definitely budget for a potential nursing-home stay. Lee Slavutin, a life insurance agent and consultant in New York City, points out that paying for nursing-home care is not really an issue for the poor and the rich. Those with few resources can qualify for Medicaid, a federal-state program that pays for health care. Those who are wealthy can go it alone. It's the middle group, who have a net worth of $500,000 to $10 million, who generally have the most need for long-term care insurance, says Slavutin.

Medicare, the federal program most people associate with health care for the elderly, offers very limited help. Usually it only pays the nursing-home expenses of patients who have been hospitalized for at least three days and whose doctors say they require skilled nursing, both to manage their condition and to provide services (such as physical therapy). What's more, once the patient is admitted to a nursing facility, Medicare pays fully for only 20 days. The patient must make a daily co-payment of $97 from the 21st to the 100th day, after which the patient pays the entire bill.

To calm fears about being financially devastated by nursing-home costs, many people are buying long-term care insurance. The coverage usually offers a per-day rate, such as $100, for a specific amount of time, such as two or five years. Many policies also pay some expenses for at-home care. The idea behind this insurance is to avoid being forced to ''spend down'' family assets in order to qualify for subsidized coverage from Medicaid. The AARP's free guide, Long-Term Health Insurance: Understanding Your Options, suggests that before buying such insurance, you take stock of your net worth and income to determine how much you can afford for a policy and how much coverage you'll need to pay any nursing-home bills. If you decide you need the coverage, ask your state insurance department for a list of companies that offer policies in your state.

One other option is a life insurance policy with an ''accelerated death benefit.'' That allows you to take the proceeds if you're diagnosed with a terminal illness or one that will require extended care. The American Council of Life Insurance says 78% of life insurers offer these policies, and only 13% of them charge an extra premium for the accelerated benefit. The downside is that if you spend the life insurance on nursing-home bills, it will not be available to your survivors.

LAST RESORT. Another approach is to buy into a residential ''life care'' community that offers increasing levels of care as you age. You start by living independently in your own housing unit, but you're able to move up to higher levels of care as you need them at no or little more expense. That's because you're making an investment in the community from the outset, not just paying rent. Alternatively, if you're at least 62 and have substantial equity in your home, you can get a reverse mortgage and use the proceeds to pay for long-term care expenses or insurance premiums. (For more information, visit www.reverse.org, the site of the nonprofit National Center for Home Equity Conversion.)

For people without insurance or savings, Medicaid is the last resort. But figuring out how to qualify can be difficult because the states have wide latitude for setting their own requirements concerning the amount of assets and income a nursing-home resident and spouse may retain.

The Henry J. Kaiser Family Foundation, which supports research on Medicaid, says that in most states the program will pay nursing-home bills if an individual's assets are less than $2,000 and a couple's less than $3,000, and if a patient uses all of his or her income--except for about $30 a month for personal needs--to pay for care. Certain assets are exempt from the limit: a home, its furnishings, a car, and sufficient funds to cover burial expenses. A patient who has bank or brokerage accounts will be required to use those to pay for care before qualifying for Medicaid. Income limits vary by state, but if your spouse enters a nursing home in 2000 and you do not, you may keep from $16,824 to $84,120 in annual income, and you may remain in the family home.

Experts identify two major challenges to planning for eventual Medicaid assistance. If you want to leave assets to your heirs, you can protect those assets from a Medicaid ''spend down'' only by transferring them to someone else at least three years before you enter a nursing home or, if you set up certain kinds of trusts, five years before admittance.

Planning ahead is especially appropriate for a married couple with one healthy spouse and one who is much older or ill. When the sick spouse enters the nursing home, says Herb Semmel, an attorney for the National Senior Citizens Law Center in Los Angeles, Medicaid will determine eligibility by considering all assets held in the names of both spouses. If some assets, such as money in a brokerage account, are needed to bring the healthy spouse's income up to the state-approved level, they may not have to be sold. However, the rules governing asset transfer are complex and vary from state to state. Semmel says that before you take action, it's essential to get advice from a lawyer who is an expert in Medicaid and estate planning.

Be aware as well that once a nursing-home patient and his or her spouse have died, federal law requires states to try to reimburse Medicaid by recovering money from the estate. Thus, even if parents bequeath their home to their children, the state may try to sell it to pay the deceased's Medicaid bills. Other assets, such as a joint bank account or part interest in a business or property, may also be targeted.

The financial options listed here are no more appealing than the possibility of having to go to a nursing home. But what hurts most is if you do no planning at all and have to scramble when a crisis hits.

By ELLEN HOFFMAN

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