When Wealth Falls, Care Needs Rise: Rewiring Long-Term Care for the Next Shock

Shocks drain savings and push retirees to Medicaid
Make LTC countercyclical: shock-based eligibility, rapid HCBS, reinsurance
Pre-fund modest universal benefits to slow spend-down and keep care at home

A stubborn figure defines long-term care finance. Just 6% of Medicaid enrollees using LTSS account for 37% of total Medicaid spending. In 2024, a private room in a U.S. nursing home averaged $127,750 per year, with semi-private rooms about $111,325. Medicaid is now the primary payer for 63% of nursing home residents. These numbers tell a clear story: when markets fall, or health shocks happen, “self-insurance” quickly collapses for many older adults. Households rapidly spend down assets and turn to public coverage, creating a central long-term care policy problem and an opportunity for reform. Recognizing that adverse shocks drive middle-class retirees toward public financing, the system should intentionally absorb these shocks in a predictable, humane way at lower cost.

The case for planning around long-term care wealth shocks

The case for planning around long-term care wealth shocks becomes clear when we examine how people manage risk today. The traditional view is that people insure themselves if they can and turn to public programs only as a last resort. This is true at the top of the wealth distribution after good years in the housing and equity markets. However, the U.S. retirement landscape has shifted. Long-term care primarily involves custodial support that Medicare does not cover. Meanwhile, private long-term care insurance has decreased and become more expensive. In 2024-2025, analysts confirmed what families already know: medical shocks related to hospital or drug spending are now better cushioned—thanks to the new $2,000 Part D cap—yet long-term care shocks remain largely uninsured and often fall to Medicaid. When the cost of a single nursing home year resembles a middle-class salary, “self-insurance” is a fragile promise.

The link to wealth is real. Studies using the Health and Retirement Study show that substantial adverse wealth shocks—defined as a 75% or greater loss of net worth within 2 years—are standard and harmful. About one-quarter of older adults experience such a loss over long follow-ups, and the consequences result in higher mortality and faster cognitive decline. We do not need these findings to make a moral case, but they do strengthen the policy argument. A system that waits for people to exhaust their assets after a shock incurs later costs—often higher costs, often in institutions, and usually after families have spent down savings that also supported spouses and adult children.

Health shocks versus “everyday” medical costs

The new Medicare drug out-of-pocket cap changes the stakes for older Americans by capping annual Part D spending. Fidelity’s 2025 estimate shows a single 65-year-old retiree will spend about $172,500 on health costs. While high, the drug cliff is now more manageable. Long-term care costs, however, keep rising faster than inflation. Assisted living’s national median hit about $70,800 in 2024; home care also increased. For most retirees, these are not “expenses”; they are shocks that arrive suddenly and last a long time. Studies show that medical shocks are usually well-insured in retirement; long-term care shocks are not, leaving Medicaid as a backup.

Where does private insurance stand? Claims paid by private long-term care policies reached record levels in 2023, but participation has been declining across states. In the years leading up to 2025, fewer adults had these policies, and coverage has shrunk even as prices have risen. Recent research shows that positive wealth shocks encourage households to rely more on self-insurance and private coverage. But when volatility trends negatively, the private market does not expand to meet demand; households pull back. The outcome is predictable: greater reliance on unpaid family care, delayed home help, and sudden Medicaid entry once a crisis reaches a certain threshold.

Designing countercyclical support for long-term care wealth shocks

If long-term care wealth shocks are the pressure point, the response must be countercyclical. Public programs should assist more people when markets fall and relieve pressure when markets rise. There are proven methods. First, align eligibility with shocks rather than just with static assets. When housing or portfolio values drop sharply, states could trigger automatic, temporary adjustments to Medicaid LTSS rules: higher asset disregards, expedited functional assessments, and immediate authorizations for home- and community-based services (HCBS). The logic is straightforward. Early HCBS funding prevents institutionalization, keeps spouses in the house, and reduces later spending. KFF’s data highlight the stakes: people who use LTSS are a small share of enrollees but account for well over a third of program costs, and spending on HCBS now exceeds spending on institutions nationally. Better timing is a matter of fiscal prudence, not generosity.

Second, stabilize cash flow for families just above Medicaid thresholds. A short, automatic subsidy for LTC expenses when local prices spike—linked to the Genworth/CareScout cost benchmarks—would allow middle-income households to buy hours of care at home during a downturn. This would help them avoid crossing the spend-down threshold. The subsidy would phase out as portfolios recover, much as unemployment insurance phases out during job recovery. This approach acknowledges that nursing home care is the most expensive setting, that Medicaid pays for most residents there, and that over four in five Medicare beneficiaries in nursing homes also have Medicaid coverage. The cheapest bed remains the living room couch if the right support is provided in time.

Long-term care wealth shocks — from ad hoc relief to pre-funded protection

The U.S. can also learn from effective models. Washington State’s WA Cares Fund created a universal, payroll-financed, inflation-indexed LTC benefit (around $36,500 at launch). Germany’s social long-term care insurance pools risk nationally through wage-based contributions, with recent rate adjustments that respond to demographic pressure and caregiver politics. Neither model is perfect, but both show that stable, broad risk pools can provide a predictable benefit that cushions shocks before Medicaid takes over. In a federal system, states can initiate “WA Cares-lite” benefits tied to HCBS hours and then expand them. The federal role involves matching states that create pre-funded reserves and enforcing portability across state lines.

A reasonable federal companion is “catastrophic LTC reinsurance.” Plans—public or private—that cover home care and assisted living could buy protection against multi-year, high-severity claims. Reinsurance lowers premiums, attracting more buyers during prosperous years. In challenging years, it caps system risk. Together with updated tax incentives for employer-sponsored LTC benefits, this creates a pathway for younger workers who might otherwise retire without coverage. The goal is not to replace Medicaid but to delay spend-down, reduce the peak costs driving that 37% spending share, and provide families with tools to manage the initial months of a care shock without depleting savings or selling a home during a market downturn.

From crisis entry to early intervention

Medicaid policy currently assumes that the typical route to coverage will be slow and predictable. However, evidence suggests otherwise. Costs can be sudden, appearing as a broken hip, an early dementia diagnosis, or a caregiver’s injury. Once a household reaches a breaking point, assets decrease quickly. Several practical changes could improve this situation. First, implement rapid-response HCBS assessments and interim payments. The federal government could require states to make provisional decisions within 14 days for applicants who meet clear functional criteria, with eligibility later reconciled. Second, treat the first ninety days of paid home care as “preventive care.” This approach allows states to use enhanced federal funding for starter packages of personal care hours, respite, and basic home modifications. Third, ensure swift coordination for dual-eligible beneficiaries. More than 80% of Medicare beneficiaries in nursing homes also have Medicaid. Integrated financing is essential during a shock; it is the standard operating procedure.

To ensure lasting impact, regulators should also focus on transparent price benchmarks. The Genworth/CareScout survey currently reports national and state medians that—while not perfect—are widely recognized and independently validated by industry press. Linking short-term subsidies and HCBS rate floors to those medians would reduce manipulation and provide families with a reliable number for planning. The trend is clear year after year: homemaker, home-health, assisted living, and nursing home costs all increased in 2024, with assisted living rising by 10%. Policy should keep pace with these prices; otherwise, it is merely policy in name.

Anticipating the critiques—and answering them with evidence

One critique argues that if households saved more, they would not need assistance after a downturn. The data do not support that claim. Even with strong market years through 2022, median savings are too low to cover multi-year care expenses. The private market serves only a small portion of older adults, despite the claims paid. Public data reflect a structural gap: a small share of enrollees who require LTSS accounts for a substantial share of Medicaid budgets. Another concern is “crowd-out”—that better public options would shrink the private market. The realistic goal is not to eliminate private insurance; it is to ease crises so that fewer families are rushed into institutions and Medicaid due to high costs. Early HCBS funding and catastrophic reinsurance accomplish that.

A third critique points to recent studies showing that positive wealth shocks do not significantly affect Medicaid enrollment; therefore, the opposite might not either. This is a fair point. However, the policy question here is not whether a windfall triggers program entry. It is whether a significant negative shock, combined with a caregiving need, accelerates spend-down and pushes families toward public finance. The payer mix in nursing homes, the steady decline of private LTC coverage, and the rising costs of care clearly indicate that the backup is already public. The choice is between a planned, countercyclical entry at home or an urgent, costly entry into institutions.

The real burden also includes the family. When formal help is delayed, unpaid care increases. Caregivers may reduce hours or leave jobs, which heightens household risk. This fallout does not appear in the nursing home bill but is reflected in Social Security records and later in Medicare spending. One more market reform can help: encourage employers to provide automatic-enrollment “LTC emergency accounts” alongside HSAs and 401(k)s—modest, liquid savings designated for care gaps. These funds would not replace insurance or Medicaid. They would help families manage when a parent returns home needing immediate assistance. Evidence from benefit design shows that automatic enrollment increases participation. This would likely apply here as well, particularly when paired with small-employer contributions. A drug cap and lower Medicare Advantage premiums will offer some relief, but long-term care remains a significant risk.

Build a shock-ready long-term care system

The opening numbers remain our guide: a small share of Medicaid users drives a large share of spending, a nursing home year costs more than many annual salaries, and most residents depend on Medicaid as a payer of last resort. These facts won’t change with financial advice alone. They change when policy recognizes that long-term care wealth shocks are regular and structures around them. Tie eligibility to shocks, not just to static assets. Advance home care. Reinsure catastrophic risks. Pre-fund modest universal benefits during the working years. Allow private coverage and savings to do what they do best—provide comfort and choice—while the public system does what only it can—catch people when the safety net disappears. A system built on this logic would not only save money; it would protect families from the chaos of a crisis. In the next downturn, the difference will be fewer rushed admissions, more days at home, and a Medicaid budget that promotes stability instead of desperation.

The views expressed in this article are those of the author(s) and do not necessarily reflect the official position of the Swiss Institute of Artificial Intelligence (SIAI) or its affiliates.

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