Long-Term Care: Baby Boom Generation Increases Challenge of	 
Financing Needed Services (27-MAR-01, GAO-01-563T).		 
								 
The confluence of the aging baby boom generation, longer life	 
expectancies, and evolving options for providing and financing	 
long-term care services will require  substantial public and	 
private investment in long-term care and the development of	 
sufficient capacity to serve this growing population. Spending	 
for long-term care was about $134 billion in 1999. Medicaid and  
Medicare paid for nearly 58 percent of these services,		 
contributing about $59 billion and $18 billion, respectively.	 
Private long-term care insurance was viewed as a possible way to 
reduce catastrophic financial risk for the elderly needing	 
long-term care and to relieve some of the financing burden now	 
shouldered by public long-term care programs. Yet private	 
insurance represents only about 10 percent of long-term care	 
spending. Questions remain about the affordability of policies	 
and the value of the coverage relative to the premiums charged,  
and while many states have adopted standards for long-term care  
policies, it is uncertain whether these fully assure consumer	 
confidence in the reliability of long-term care insurance. If	 
long-term care insurance is to have a more significant role in	 
addressing the baby boom generation's upcoming chronic health	 
care needs, the policies offered must be viewed by consumers as  
reliable, affordable products with benefits and limitations that 
are easy to understand. 					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-563T					        
    ACCNO:   A00684						        
    TITLE:   Long-Term Care: Baby Boom Generation Increases Challenge 
             of Financing Needed Services                                     
     DATE:   03/27/2001 
  SUBJECT:   Elder care 					 
	     Elderly persons					 
	     Health insurance					 
	     Home health care services				 
	     Long-term care					 
	     Nursing homes					 
	     Projections					 
	     Medicaid Program					 
	     Medicare Program					 

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GAO-01-563T
For Release on Delivery Expected at 10: 00 a. m. Tuesday, March 27, 2001

GAO- 01- 563T

LONG- TERM CARE Baby Boom Generation Increases Challenge of Financing Needed
Services

Statement of William J. Scanlon Director, Health Care Issues Testimony

Before the Committee on Finance, U. S. Senate

United States General Accounting Office

GAO

Page 1 GAO- 01- 563T

Chairman Grassley, Ranking Member Baucus, and Members of the Committee:

I am pleased to be here today as you discuss the challenges we as a society
face in financing long- term care needs. These challenges are formidable
already, as an estimated 9 million persons age 18 or older receive longterm
care assistance, either at home or in institutions such as nursing homes.
While family members provide much care, paying for purchased services
presents a significant financial burden for many individuals and for public
health care programs. For those needing nursing home or other extensive
continuous care, the costs can be substantial. On average, nursing home care
currently costs $55, 000 annually, with many nursing home residents paying
much of that out of their own pockets.

Providing and financing long- term care will become even more challenging in
just over a decade when the 76 million baby boomers begin to turn 65. Over
the next 30 years, the number of elderly individuals is expected to double.
Moreover, with baby boomers expected to live longer and greater numbers
reaching age 85 and older, this generation is expected to have a dramatic
effect on the number of people needing long- term care services, as the
prevalence of disabilities and dependencies increases with age. To help
alleviate the pressures on public programs and families in meeting the needs
of these persons, some advocate a growing role for private longterm care
insurance. Several recent congressional initiatives aim to increase the use
of private insurance in financing long- term care needs. These initiatives
include establishing a program to make group long- term care insurance
available to federal employees, members of the uniformed services, and
civilian and military retirees; and proposals to provide additional tax
subsidies to individuals purchasing long- term care insurance.

In view of these issues, you asked us to provide the Committee information
on long- term care insurance to assist you in considering what role it may
play in meeting future long- term care needs. Accordingly, my remarks today,
which are based on our previous work and other published and ongoing
research, 1 focus on (1) the increased demand an aging baby boom generation
will likely create for long- term care; (2) an overview of current spending
for long- term care, including recent changes in Medicaid and Medicare
financing of long- term care; and (3) the potential role of private long-
term care insurance in helping finance this care, including

1 A list of related GAO products follows this statement. Long- Term Care:
Baby Boom Generation

Increases Challenge of Financing Needed Services

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 2 GAO- 01- 563T

who is likely to buy this insurance, its affordability, and the critical
need for consumer protections.

While my focus will be on financing the projected increase in the need for
long- term care for the elderly, long- term care needs of younger persons
should not be overlooked. Disability and dependency have no age boundaries,
and the long- term care needs of the nonelderly and the burden of satisfying
them can be profound. How to better meet these needs and distribute the
burden deserves our attention. However, the potential for private long- term
care insurance to assist those whose disabilities or dependencies begin at
younger ages may be very limited.

In summary, the confluence of the aging baby boom generation, longer life
expectancies, and evolving options for providing and financing long- term
care services will require substantial public and private investment in
longterm care and the development of sufficient capacity to serve this
growing population. Spending for long- term care, including post- acute and
chronic care in nursing homes and home and community- base care, was about
$134 billion in 1999. Medicaid and Medicare paid for nearly 58 percent of
these services in 1999, contributing about $59 billion and $18 billion,
respectively. Medicaid funds primarily go to nursing homes and other
institutional settings of long- term care, but home and community- based
services receive a growing share. Medicare primarily covers acute- care
services and thus plays a lesser role in financing nursing home care- by
paying only for short- term stays following a hospitalization. While the
Medicare home health benefit had grown to play a significant role in
covering long- term care, the new BBA- mandated payment system may reduce
the provision of such services. Medicaid, which is a jointly funded federal-
state program, poses a large burden on states' budgets, creating pressure on
their capacity to absorb additional costs associated with the growing need
for long- term care services over the coming decades.

Private long- term care insurance is viewed as a possible way to reduce
catastrophic financial risk for the elderly needing long- term care and to
relieve some of the financing burden now shouldered by public long- term
care programs. Yet private insurance, including both traditional health
insurance and long- term care insurance, represents only about 10 percent of
long- term care spending- about $14 billion in 1999. Less than 10 percent of
the elderly and an even lower percentage of the near- elderly have bought
long- term care insurance, although the number of individuals purchasing
long- term care insurance increased during the 1990s. Questions remain about
the affordability of policies and the value of the coverage relative to the
premiums charged, and while many states have adopted standards for long-
term care policies, it is uncertain whether

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 3 GAO- 01- 563T

these fully assure consumer confidence in the reliability of long- term care
insurance. If long- term care insurance is to have a more significant role
in addressing the baby boom generation's upcoming chronic health care needs,
the policies offered must be viewed by consumers as reliable, affordable
products with benefits and limitations that are easy to understand.

Long- term care includes many types of services needed when a person has a
physical or mental disability. Individuals needing long- term care may have
difficulty performing some activities of daily living (ADL) without
assistance, such as bathing, dressing, toileting, eating, and moving from
one location to another. They may have mental impairments, such as
Alzheimer's disease, that necessitate supervision to avoid harm to
themselves or others or require assistance with tasks such as taking
medications. Although a chronic physical or mental disability may occur at
any age, the older an individual becomes, the more likely a disabling
condition will develop or worsen. Nearly one- seventh of the nation's
current elderly population- an estimated 5.2 million- have a limitation in
either ADLs; instrumental activities of daily living (IADL) such as
preparing food, doing housekeeping, and handling finances; or both. More
than one- third of these people have limitations in two or more ADLs.

Long- term care encompasses a wide array of care settings and services, not
only institutional care provided by nursing homes for individuals with more
extensive care needs but also home and community- based care. Nearly 80
percent of the elderly requiring assistance with ADLs or IADLs live at home
or in community- based settings, while more than 20 percent live in nursing
homes or other institutions. The majority of long- term care is provided by
unpaid family caregivers to elderly individuals living either in their own
homes or with their families. However, a growing minority of the elderly
receives paid assistance from various sources. For example, state Medicaid
programs have increased significantly the number of beneficiaries receiving
in- home or community services. In addition, alternatives to nursing home
care, such as assisted- living arrangements, are developing that have long-
term care services available.

Long- term care needs are an especially significant concern for women. Women
represent 7 of 10 unpaid caregivers, three- quarters of nursing home
residents 65 years and older, and two- thirds of home health care users.
Given their longer life expectancies and the fact that married women usually
outlive their spouses, many women face a greater risk of needing long- term
care by a paid caregiver. Background

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 4 GAO- 01- 563T

The baby boom generation, about 76 million people born between 1946 and
1964, will contribute significantly to the growth in the number of elderly
individuals who need long- term care and in the amount of resources required
to pay for it. The oldest baby boomers are now in their fifties. In 2011,
the first of the baby boomers born in 1946 will turn 65 years old and become
eligible for Medicare. The Medicaid program, which pays for many health care
services for low- income elderly, including nursing home care, will also
begin to be affected. Baby boomers are likely to have a disproportionate
effect on the demand for long- term care because more are expected to live
to advanced ages, when need is most prevalent. The first baby boomers reach
age 85 in 2030.

In 2000, individuals aged 65 or older made up 12. 7 percent of our nation's
total population. By 2020, that percentage will increase by nearly onethird
to 16.5 percent-- one in six Americans-- and will represent nearly 20
million more seniors than there are today. By 2040, the number of seniors
aged 85 years and older will more than triple to 14 million (see fig. 1).
The Baby Boom

Generation Will Greatly Expand Demand for LongTerm Care

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 5 GAO- 01- 563T

Figure 1: Estimated Number of Elderly Individuals in 2000, 2020, and 2040

0 10

20 30

40 50

60 70

80 90

2040 2020 2000 85+

65 to 84

4.3 14.3

62.9 30.5

6.8 47.0 In Millions

Source: Bureau of the Census, “Projections of the Total Resident
Population by 5- Year Age Groups and Sex With Special Age Categories: Middle
Series,” selected years 2000 to 2040 (Jan. 2000).

Projecting the number of baby boomers who will need long- term care services
is complicated by several factors. While experts agree that the growing
elderly population will increase the number of disabled elderly needing
long- term care over the next several decades, no consensus exists on the
size of that increase. Projections of the number of disabled elderly who
will need care range between 2 and 4 times the current number. Researchers
also disagree about the effects of better health care and healthier
lifestyles on the baby boomers' need for long- term care. Some contend that
medical advances have increased life expectancy but have not changed the age
of onset of illness and that therefore the need for

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 6 GAO- 01- 563T

long- term care may have increased. Others contend that better treatment and
prevention could decrease the time period at the end of life when long- term
care is needed.

Baby boomers may also have a disproportionate effect on the demand for paid
services. Many baby boomers will have fewer options besides paid long- term
care providers because a smaller proportion of this generation may have a
spouse or adult children to provide unpaid caregiving. This likelihood stems
from the geographic dispersion of families and the large percentage of women
who work outside the home, which may reduce the number of unpaid caregivers
available to elderly baby boomers.

In 1999, spending for nursing home and home health care was about $134
billion. Individuals needing care and their families paid for almost 25
percent of these expenditures out- of- pocket, public programs
(predominantly Medicaid and Medicare) funded 61 percent, private insurance
(including long- term care insurance as well as services paid by traditional
health insurance) accounted for about 10 percent, and other private sources
paid the remaining 5 percent (see fig. 2). These amounts, however, do not
include the many hidden costs of long- term care. For example, they do not
include wages lost when an unpaid family caregiver takes time off from work
to provide assistance. An estimated 60 percent of the disabled elderly
living in communities rely exclusively on their families and other unpaid
sources for their care. Public Programs and

Out- of- Pocket Spending Predominantly Finance Long- Term Care Services

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 7 GAO- 01- 563T

Figure 2: Percentage of Expenditures for Nursing Home and Home Health are,
by Source of Payment, 1999

Note: Also includes Medicaid expenditures for home and community- based
services, which are considered as part of “other personal health
care” in the Health Care Financing Administration's (HCFA) national
health care accounts.

Source: Department of Health and Human Services, HCFA, Office of the
Actuary, National Health Statistics Group, Personal Health Care
Expenditures, 2001.

Other public Other private

Private insurance Medicare Out- of- pocket Medicaid 2.9%

4.6% 10.3%

13.7% 24.6% 43.8%

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 8 GAO- 01- 563T

Medicaid, a joint federal- state health financing program for low- income
individuals, continues to be the largest public funding source for long-
term care. Within broad federal guidelines, states design and administer
Medicaid programs that include coverage for certain mandatory services, such
as skilled nursing facility care, and other optional coverage, including
home and community- based services. Long- term care services under Medicaid
are not limited to adults- about 1 million children with special needs also
receive long- term care services from Medicaid. Although most Medicaid long-
term care expenditures are for nursing home care, in the last two decades
the proportion of expenditures for home and communitybased care has
increased. By fiscal year 1998, the number of Medicaid recipients receiving
home health or home and community- based services was similar to the number
of Medicaid recipients receiving nursing facility services. How much service
Medicaid provides varies among states, and Medicaid financing can be
vulnerable to shifts in state revenues.

State Medicaid programs have, by default, become the major form of insurance
for long- term care. About two- thirds of nursing home residents in 1998
relied on Medicaid to help pay for their care, but Medicaid provides
insurance only after individuals have become nearly impoverished by
“spending down” their assets. Medicaid eligibility for many
elderly persons results from having become poor as the result of depleting
assets to pay for nursing home care, which costs an average of $55,000 per
year. 2

In most states, nursing home residents without a spouse must have less than
$2,000 in countable assets to become eligible for Medicaid coverage. An
overall increase in wealth among the elderly means that a smaller proportion
of elderly individuals will initially qualify for Medicaid- and others will
need to become impoverished before they qualify.

States historically limited coverage of in- home services under Medicaid
because of concern about the potential cost of covering services for the
large number of disabled who were being cared for by their families.
However, as part of the Omnibus Budget Reconciliation Act of 1981, the
Congress established the home and community- based service waiver program.
The waiver program gave states the option of applying for Medicaid waivers
to fund home and community- based services for people, including the
nonelderly, who met Medicaid eligibility requirements for nursing home care.
These waivers also allowed states to restrict the

2 MetLife Mature Market Institute survey, 2000. This survey also found that
nursing home costs vary widely by geographic region, from nearly $33,000 per
year in Hibbing, Minnesota, to more than $100, 000 per year in the Borough
of Manhattan in New York City. Medicaid

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 9 GAO- 01- 563T

number and costs of eligible individuals served under Medicaid in home and
community- based settings. All states now have home and communitybased
waivers, and more than 200 waiver programs served more than 450,000
individuals nationwide in fiscal year 1998. Medicaid expenditures for home
and community- based waivers increased an average of 29 percent per year
from 1988 to 1999, reaching over $10 billion in 1999. The extent of services
provided varies considerably among the states. Medicaid per capita
expenditures for home care in 1999 ranged from a low of about $8 in
Mississippi to a high of nearly $230 in New York. 3

Medicaid is a significant share of state budgets- comprising 20 percent on
average. Dependence on state budgets makes Medicaid financing vulnerable to
states' fiscal health. States generally must maintain balanced budgets
without deficits, and their revenues often decline in periods of low or
negative economic growth. A recent fiscal survey of states showed that about
one- half of states are expecting declines in revenue growth for 2001 to
2002, and a few states are reducing current- year appropriations and making
other adjustments to maintain balanced budgets. 4 At the same time, onehalf
of the states estimate that Medicaid spending will exceed their current
projections. With declining revenue and increasing Medicaid expenditures,
maintaining balanced budgets in states may require constraining Medicaid
expenditures, including the large share represented by long- term care
services.

While Medicare primarily covers acute care, in the early 1990s it also
became a de facto payer for some long- term care services. 5 However, as
spending for both skilled nursing facility services and home health care
became the fastest growing components of Medicare, the Congress in the
Balanced Budget Act of 1997 (BBA) introduced new payment systems for nursing
facilities and home health providers to control this spending.

In contrast to Medicaid, which paid nearly half of total nursing home and
other institutional care expenditures in 2000, Medicare plays a relatively
small role, paying only about 12 percent of total nursing home and other
institutional care expenditures. Medicare primarily covers acute- health

3 The range excludes Arizona, which is unique in having a capitated long-
term care system. 4 National Association of State Budget Officers, National
Governor's Association, The Fiscal Survey of States: December 2000 (
Washington, D. C.).

5 Medicare predominantly covers the elderly, but more than 5 million of the
39 million Medicare beneficiaries are nonelderly disabled individuals
eligible for Medicare because they have received Social Security or Railroad
Retirement Board disability benefits for at least 2 years. Medicare

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 10 GAO- 01- 563T

care costs and therefore limits its nursing home coverage to short- term,
post- acute stays of up to 100 days per spell of illness following
hospitalization. Medicare nursing home spending increased from $1.7 billion
in 1990 to $10.4 billion in 1998 and declined to $9. 6 billion in 1999.

Since 1989, Medicare became a significant funding source of home care,
financing $8. 7 billion in care in 1999- or more than one- fourth of the
home care purchased for the elderly. Court decisions and legislative changes
in coverage essentially transformed the Medicare home health benefit from
one focused on patients needing acute, short- term care after
hospitalization to one that primarily served chronic, long- term care
patients. By 1994, only about one- fourth of home health visits covered by
Medicare occurred within 60 days following a hospitalization. As a result,
Medicare, on a de facto basis, financed an increasing amount of long- term
care through its home health care benefit. Both the number of beneficiaries
receiving home health care and the number of visits per user more than
doubled from 1989 to 1996. From 1990 to 1997, the average annual growth rate
for Medicare home health care spending was 25.2 percent- more than 3 times
the growth rate for Medicare spending as a whole. This increase in the use
of these services cannot be explained by any increase in the incidence of
illness among Medicare beneficiaries.

In response to concerns about the growth in spending for Medicare services,
including skilled nursing facility and home health services, the BBA
included provisions to slow Medicare spending growth. The BBA required
prospective payment systems (PPS) to be implemented for Medicare services
provided through home health care agencies and skilled nursing facilities,
replacing retrospective, cost- based reimbursement systems that did not
provide adequate incentives to control costs. The skilled nursing facility
PPS began to be implemented in July 1998 and will be completely phased in
this year.

For home health, rather than immediately introducing a PPS, an interim home
health care payment system was implemented in October 1997, pending
development of a case- mix adjusted prospective payment system. Between 1997
and 1998, Medicare home health spending fell by nearly 15 percent, while
home health visits dropped sharply by 40 percent, and this decline continued
in 1999. 6

The new home health PPS, implemented in October 2000, is expected to be a
more appropriate payment tool than the interim payment system because it is
designed to more closely align

6 See Medicare Home Health Care: Prospective Payment System Could Reverse
Recent Declines in Spending (GAO/ HEHS- 00- 176, Sept. 8, 2000).

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 11 GAO- 01- 563T

payments with patient needs. 7 PPS rates are based on a higher number of
home health visits per user than those currently being provided. As a
result, the PPS can support a large expansion of services. However, PPS
incentives are intended to reward efficiency and control use of services.
Because criteria for what constitutes appropriate home health care do not
exist, it may be difficult for Medicare to ensure that patients receive all
necessary services. How home health agencies respond to the PPS and its
incentives could have major implications for the amount of future Medicare
funding for home health care, the services provided, and whether Medicare
remains a significant payer of long- term care.

Many baby boomers will have more financial resources in retirement than
their parents and may therefore be better able to absorb some long- term
care costs. However, long- term care will represent a catastrophic cost for
a relatively small portion of families. Private insurance can provide
protection for such catastrophes because it spreads the risk among larger
numbers of persons. Private long- term care insurance has been viewed as a
means of both reducing potential catastrophic financial losses for the
elderly and relieving some of the financing burden now shouldered by public
long- term care programs. Some observers also believe private longterm care
insurance could give individuals a greater choice of services to satisfy
their long- term care needs. However, less than 10 percent of elderly
individuals and even fewer near- elderly individuals (those aged 55 to 64)
have purchased long- term care insurance. The National Association of
Insurance Commissioners' (NAIC) most recent data show that approximately 4.
1 million persons were insured through long- term care policies in 1998,
compared with 1.7 million persons in 1992. 8 In contrast, about two- thirds
of the elderly- about 23 million individuals- have private Medicare
supplemental (Medigap) insurance policies for nonMedicare- covered expenses
such as copayments, deductibles, and prescription drugs.

Barriers to purchasing long- term care policies still exist, including
misunderstandings among consumers about the roles of public programs,
personal resources, and private insurance in financing long- term care.
Private long- term care insurance is still a little known product, but
insurance providers are seeking to build a larger market. Many baby

7 See Medicare: Refinements Should Continue to Improve Appropriateness of
Provider Payments (GAO/ T- HEHS- 00- 160, July 19, 2000). 8 The accuracy of
these policy numbers is dependent upon the accuracy of the information filed
by the insurers themselves with the NAIC. Private Long- Term

Care Insurance Is Small but Growing

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 12 GAO- 01- 563T

boomers continue to believe they will never need such coverage. A recent
survey of the elderly and near elderly found that only about 40 percent
believed that they or their families would be responsible for paying for
their long- term care. Some mistakenly believed that public programs,
including Medicaid and Medicare, or their own health care insurance would
provide comprehensive coverage for the services they need. This low
perceived need for protection decreases demand for long- term care
insurance. People also may be concerned about whether they can afford such
insurance now or in the future when their premiums may increase and their
retirement incomes may have decreased.

Some employers offer employees a voluntary group policy option for longterm
care insurance, but this market remains small and includes predominantly
large employers. Usually employers do not pay for any of the costs of these
policies, but group policies have lower administrative costs than
individually purchased policies, which can result in lower premiums. One
study estimated that 6 to 9 percent of eligible employees took advantage of
employer- provided group long- term care insurance where it was available. 9
Last year, the Congress passed legislation to offer unsubsidized, optional
group long- term care insurance to federal employees and retirees beginning
by fiscal year 2003. This initiative will likely establish the largest group
offering of long- term care insurance and could significantly expand this
market.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)
extended tax deductibility of some premiums and tax exemptions for certain
benefits to qualified long- term care insurance policies that must satisfy
certain consumer protection standards and other requirements. 10 The
consumer protection standards are deemed satisfied if a policy complies with
NAIC's Long- Term Care Model Act and Regulation as of 1993. As of July 1998,
the Health Insurance Association of America (HIAA) reported that all 50
states (which have primary responsibility for regulating insurance policies)
required policies to adhere to at least three

9 Steven Lutzky and others, Preliminary Data From a Survey of Employers
Offering Group Long- Term Care Insurance to Their Employees: Interim Report(
June 1999). 10 A qualified long- term care insurance plan is defined as a
contract that covers only long- term care services; does not pay for
services covered under Medicare; is guaranteed to be renewable; does not
provide for a cash surrender value or other money that can be paid,
assigned, pledged as collateral for a loan, or borrowed; applies all refunds
of premiums and all policyholder dividends or similar amounts as a reduction
in future premiums or to increase future benefits; and meets certain
consumer protection standards. Also, payments received from a qualified plan
are considered medical expenses and are excluded from gross income for
determining income taxes. Per diem policies that pay on the basis of
disability rather than reimbursing for services used are subject to a cap of
$180 per day per person in 1998. Out- of- pocket expenses for long- term
care are allowed as itemized deductions along with other medical expenses if
they exceed 7.5 percent of adjusted gross income.

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 13 GAO- 01- 563T

of these NAIC long- term care insurance standards. These three standards
require policies to (1) not make prior hospitalization a condition for
coverage, (2) have an outline of the coverage the policy provides, and (3)
be guaranteed to be renewable and noncancelable except for nonpayment of
premiums. In addition, all but one state adheres to the NAIC definition of
long- term care insurance (policies that provide coverage for at least 12
months for necessary services provided in settings other than acute- care
hospital units), and all but two states adhere to the preexisting conditions
standard. Overall, HIAA identified 14 NAIC provisions specified for longterm
care policies to be tax- qualified under HIPAA that had been adopted by at
least 35 states as of July 1998.

Many elderly and near- elderly individuals question the affordability and
the value of long- term care insurance relative to the premiums charged.
Long- term care insurance costs vary depending on the policyholder's age at
the time of purchase, optional benefits and terms selected, and the insurer.
Premiums for a 65- year- old are typically about $1,000 per year and can be
much higher for more generous coverage or for older buyers. The
affordability of long- term care insurance determines to a great extent its
market and is a key factor in individuals' decisions to purchase and retain
a long- term care insurance policy. Although assessing whether individuals
can afford a policy is subjective, some studies estimate that long- term
care insurance is affordable for only 10 to 20 percent of the elderly.
Affordability is even more of an issue for married couples, who must each
purchase individual coverage. While some insurers offer discounts to married
couples when both purchase long- term care coverage, elderly couples are
still likely to pay at least several thousand dollars annually for long-
term care coverage. Those who consider and decide against purchasing long-
term care insurance say they are skeptical about whether private policies
will give adequate coverage. Those who do find long- term care insurance
affordable when purchased may later decide it is not if their financial
circumstances change or the premiums increase. An industry group estimates
that 55 to 65 percent of all long- term care insurance policies sold as of
June 1998 remain in force.

Insurers state that it is prudent to buy long- term care insurance earlier
rather than later in life because premiums are based largely on an
individual's age when the policy is purchased. A policy purchased when a
person is in his or her 40s or 50s has much lower premiums than a policy
purchased later; however, the younger person pays the premiums over a longer
period. If a person waits until age 79 to buy, the premiums are typically
about 2- 1/ 2 times higher than if the same policy had been Affordability of
Long- Term

Care Insurance Concerns Many Elderly Individuals

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 14 GAO- 01- 563T

purchased when he or she was 65, and about 6 to 10 times higher than if the
policy had been purchased at age 50.

Unfamiliarity with the concept and uncertainty of the value of long- term
care insurance may deter some people from purchasing a policy. A relatively
low premium at age 45 may nonetheless seem high for a risk that may not be
realized for 40 years. Concerns about the cost of premiums relative to the
value of policies may be a factor deterring purchases, especially when
premiums for a similar policy for the same individual can vary widely. For
example, a 65- year- old in Wisconsin can pay $857 to $2,061 per year for a
long- term care insurance policy depending on the carrier, even if the terms
are similar. 11

Consumers deserve complete and accurate information about any insurance
product that they purchase, and sales of long- term care policies are not
likely to increase significantly unless consumers are given adequate and
understandable information to assess them. If long- term care insurance is
to help address the baby boom generation's future longterm care needs,
individuals must understand what they are buying and what future changes, if
any, they may face in their policy's coverage or premiums. While NAIC's
model standards have helped address prior deficiencies in the terms of long-
term care policies, 12

it is uncertain whether these have been sufficient to assure consumers that
long- term care products are reliable and the terms of the products are
easily understood and will be fulfilled. Recently, NAIC further amended its
models in response to concerns about dramatic premium increases that some
long- term care policyholders experienced.

In August 2000, NAIC amended its Long- Term Care Insurance Model Act and
Regulation to strengthen consumer disclosure and encourage insurers to set
initial rates at levels unlikely to require further increases. In part, this
was intended to address problems such as those highlighted by a recently
settled class action lawsuit involving long- term care policyholders in
North Dakota who had dramatic premium increases- some by more

11 Annual premiums for individual basic long- term care insurance policies
marketed in Wisconsin as of October 1999, with a $100 per- day nursing home
benefit, $50 per- day home health benefit, lifetime benefits, a 90- or 100-
day elimination period, and no optional benefits.

12 In 1993, we reported on a number of problems in the long- term care
insurance market, including those related to disclosure standards, inflation
protection options, clear and uniform definitions of services, eligibility
criteria, grievance procedures, nonforfeiture of benefits, options for
upgrading coverage, and sales commission structures that potentially created
incentives for marketing abuses. See Health Care Reform: Supplemental and
Long- Term Care Insurance (GAO/ T- HRD- 94- 58, Nov. 9, 1993). Consumer
Protection Vital,

Especially If Private Insurance Plays a Larger Role in Financing LongTerm
Care

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 15 GAO- 01- 563T

than 700 percent- even though they believed that their premiums would not
increase as long as they held their policies. In states that adopt the new
NAIC model amendments, insurers will have to provide written information to
prospective purchasers explaining

that a policy's premium may increase in the future,

? why premium increases may occur,

? what options a policyholder has in the event of an increase, and

? the 10- year rate history for their policies. In states that adopt the
model, consumers will also have to specifically acknowledge that they
understand their policy's premiums may increase, and insurers must explain
any contingent benefit available to policyholders who let their policies
lapse because of a substantial rate increase. Additionally, NAIC adopted
amendments to better ensure that long- term care insurers price their policy
premiums to be sufficient over the lifetime of the policy, so as to minimize
the need for future premium increases. As a further consumer protection,
these amendments require insurers to reimburse policyholders when any rate
increase is found to be unnecessary and allow state insurance commissioners
to ban an insurer from the long- term care market if the insurer has a
pattern of offering initial policy purchasers inadequate premium rates. For
the new NAIC model provisions to become effective, states must choose to
adopt them as part of their statutes or regulations. An NAIC official
reported that some states have begun considering legislation or regulations
reflecting the revised NAIC models but that states will vary in whether and
how quickly they adopt particular portions.

The aging of the baby boomers will greatly increase the nation's elderly
population in the next 3 decades and thus increase the population who need
long- term care services. The need for these services will become more
critical after 2030, when this population reaches age 85 and older, which is
the age group with the greatest need for long- term care. Recent legislation
authorizing a new federal employees' long- term care insurance offering and
proposals that would establish new tax subsidies for the purchase of private
long- term care insurance aim to increase the role private insurance plays
in financing long- term care. Increased confidence in long- term care
insurance and the availability of affordable, reliable products are also
crucial components of private insurance if it is expected to play a larger
role in financing future generations' long- term care needs. Concluding

Observations

Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services

Page 16 GAO- 01- 563T

Chairman Grassley and Ranking Member Baucus, this concludes my prepared
statement. I will be happy to answer any questions that you or Members of
the Committee have at this time.

For more information regarding this testimony, please contact Kathryn G.
Allen at (202) 512- 7118 or John Dicken at (202) 512- 7043. Opal Winebrenner
and Carolyn Yocom also made key contributions to this statement. GAO
Contacts and

Staff Acknowledgments

Page 17 GAO- 01- 563T

Long- Term Care Insurance: Better Information Critical to Prospective
Purchasers (GAO/ HEHS- 00- 196, Sept. 13, 2000).

Medicare Home Health Care: Prospective Payment System Could Reverse Recent
Declines in Spending (GAO/ HEHS- 00- 176, Sept. 8, 2000). Medicare and
Medicaid: Implementing State Demonstrations for Dual Eligibles Has Proven
Challenging (GAO/ HEHS- 00- 94, Aug. 18, 2000).

Medicare: Refinements Should Continue to Improve Appropriateness of Provider
Payments (GAO/ T- HEHS- 00- 160, July 19, 2000). Low- Income Medicare
Beneficiaries: Further Outreach and Administration Could Increase Enrollment
(GAO/ HEHS- 99- 61, Apr. 9, 1999). Long- Term Care: Baby Boom Generation
Presents Financing Challenges (GAO/ T- HEHS- 98- 107, Mar. 9, 1998). Health
Care Reform: Supplemental and Long- Term Care Insurance (GAO/ T- HRD- 94-
58, Nov. 9, 1993).

(290052) Related GAO Products
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