Long Term Care: Baby Boom Generation Presents Financing Challenges
(Testimony, 03/09/98, GAO/T-HEHS-98-107).

Pursuant to a congressional request, GAO discussed the challenges the
country will face in financing long-term care for the baby boom
generation, focusing on: (1) the current spending for long-term care for
the elderly; (2) the increased demand that the baby boom generation will
likely create for long-term care; (3) recent shifts in Medicaid and
Medicare financing of long-term care; and (4) the potential role of
private long-term care insurance in help finance this care.

GAO noted that: (1) spending for long-term care for the elderly totalled
almost $91 billion in 1995, the most recent year for which expenditures
from all sources were available; (2) almost 40 percent of these dollars
were paid for by the elderly and their families and almost 60 percent by
Medicaid and Medicare; (3) these amounts, however, do not include many
hidden costs of long-term care, since an estimated two-thirds of the
disabled elderly living in the community rely exclusively on their
families and other unpaid sources for their care; (4) according to
current estimates by the Congressional Research Service, nearly a
quarter of the nation's elderly population--over 7 million elderly
people--have some form of disability for which they require assistance,
such as help with bathing, dressing, eating, preparing meals, or taking
medicine; (5) as the 76-million-strong baby boom generation ages, so too
will its demand for long-term care increase; (6) long-range predictions
of the magnitude of the baby boomers' long-term care needs, however,
vary, with estimates of the disabled elderly ranging from 2 to 4 times
the current disabled elderly; (7) estimates of cost are even more
imprecise due to the uncertain impact of several important factors,
including who will be needing care, the types of care they will need,
and who will fund it; (8) Medicaid and Medicare, which currently finance
almost two-thirds of long-term care, have undergone significant changes
in recent years; (9) while historically the majority of Medicaid
long-term care expenditures were for nursing home care, in recent years
there has been a shift toward more financing of home and community-based
care; (10) at the same time, Medicare, the largest public payer for
home-based care, has been paying for care that more and more resembles
long-term care; (11) private long-term care insurance, seen as a means
of helping reduce the catastrophic financial risk for people needing
long-term care and some of the financing burden that falls to public
programs, has contributed little to date; (12) it is a relatively new
form of insurance with a growing market; and (13) nevertheless, after 10
years, a very small proportion of the elderly or near-elderly have
coverage.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-HEHS-98-107
     TITLE:  Long Term Care: Baby Boom Generation Presents Financing 
             Challenges
      DATE:  03/09/98
   SUBJECT:  Elder care
             Long-term care
             Health care programs
             Home health care services
             State-administered programs
             Community health services
             Projections
             Health care costs
             Nursing homes
             Health insurance
IDENTIFIER:  Medicaid Program
             Medicare Program
             
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Cover
================================================================ COVER


Before the Special Committee on Aging, U.S.  Senate

For Release on Delivery
Expected at 1:00 p.m.
Monday, March 9, 1998

LONG-TERM CARE - BABY BOOM
GENERATION PRESENTS FINANCING
CHALLENGES

Statement of William J.  Scanlon, Director
Health Financing and Systems Issues
Health, Education, and Human Services Division

GAO/T-HEHS-98-107

GAO/HEHS-98-107T


(101718)


Abbreviations
=============================================================== ABBREV

  ADL - activity of daily living
  CRS - Congressional Research Service
  HCFA - Health Care Financing Administration
  HIAA - Health Insurance Association of America
  IADL - instrumental activity of daily living
  NAIC - National Association of Insurance Commissioners

LONG-TERM CARE:  BABY BOOM
GENERATION PRESENTS FINANCING
CHALLENGES
============================================================ Chapter 0

Mr.  Chairman and Members of the Committee: 

I am pleased to be here today to discuss the challenges the country
will face in financing long-term care for the baby boom generation.\1
Long-term care presents a significant burden for many individuals and
for public programs.  Long-term care in nursing homes currently costs
an individual more than $40,000 per year, with a substantial share of
nursing home residents paying that out of their own pockets.  In
addition to this out-of-pocket spending, Medicaid and Medicare
expenditures for long-term care for the elderly--those aged 65 and
older--exceeded $51 billion in 1995.  More than a million elderly
with extensive disabilities live at home, relying heavily on their
families for assistance.  The aging of the baby boom generation,
particularly as members become age 85 and older, will have a dramatic
impact on the numbers of people needing long-term care services and
will challenge individuals, families, and public programs to finance
and furnish that care. 

My remarks today focus on four areas:  (1) an overview of current
spending for long-term care for the elderly, (2) the increased demand
that the baby boom generation will likely create for long-term care,
(3) recent shifts in Medicaid and Medicare financing of long-term
care, and (4) the potential role of private long-term care insurance
in helping to finance this care.  My comments are based on our
previous work and on other published and ongoing research.  (See the
list of related GAO products at the end of this statement.)

In summary, spending for long-term care for the elderly totaled
almost $91 billion in 1995, the most recent year for which
expenditures from all sources were available.  Almost 40 percent of
these dollars were paid for by the elderly and their families and
almost 60 percent by Medicaid and Medicare.  These amounts, however,
do not include many hidden costs of long-term care, since an
estimated two-thirds of the disabled elderly living in the community
rely exclusively on their families and other unpaid sources for their
care. 

According to current estimates by the Congressional Research Service
(CRS), nearly a quarter of the nation's elderly population--over 7
million elderly people--have some form of disability for which they
require assistance, such as help with bathing, dressing, eating,
preparing meals, or taking medicine.  As the 76-million-strong baby
boom generation ages, so too will its demand for long-term care
increase.  Long-range predictions of the magnitude of the baby
boomers' long-term care needs, however, vary, with estimates of
disabled elderly ranging from 2 to 4 times the current disabled
elderly.  Estimates of cost are even more imprecise due to the
uncertain impact of several important factors, including who will be
needing care, the types of care they will need, and who will fund it. 

Medicaid and Medicare, which currently finance almost two-thirds of
long-term care, have undergone some significant changes in recent
years.  While historically the majority of Medicaid long-term care
expenditures were for nursing home care, in recent years there has
been a shift toward more financing of home and community-based care. 
At the same time, Medicare, the largest public payer for home-based
care, has been paying for care that more and more resembles long-term
care.\2 Both the number of beneficiaries receiving home health care
and the number of visits per user more than doubled from 1989 to
1996, with a small but significant proportion of users receiving
extensive long-term support from home health aides.  Medicare's
financing role for this care could, however, again significantly
shift as a result of the requirement in the Balanced Budget Act of
1997 to move away from a cost-based per-visit payment system to a
case-mix-adjusted prospective payment system in 1999. 

Private long-term care insurance, seen as a means of helping reduce
the catastrophic financial risk for people needing long-term care and
some of the financing burden that falls to public programs, has
contributed little to date.  It is a relatively new form of insurance
with a growing market.  Nevertheless, after 10 years, a very small
proportion of elderly or near-elderly have coverage.  For example, in
1995, private long-term care insurance covered less than 1 percent of
total long-term care expenditures.  Consumers' reluctance to purchase
long-term care insurance is attributed to their limited knowledge
about the risk of needing long-term care and the limitations on
Medicare and Medicaid long-term care coverage, as well as concerns
about the affordability of policies. 

What we know today with some certainty is that the aging of the baby
boomers will lead to a tremendous increase in the elderly population
in the next 3 decades, with an even larger increase in individuals
aged 85 and over, who are more likely to use long-term care services. 
What is less certain, however, is the nature, magnitude, and funding
sources for those services.  Financing these services--within the
context of evolving service needs and alternatives--will be a
challenge for the baby boomers, their families, and federal and state
governments. 


--------------------
\1 Long-term care, which includes an array of health, personal care,
and social and supportive services, is provided to individuals who
are at least partially unable to care for themselves because of a
disability or impairment resulting from a chronic illness or
condition--such as heart disease or diabetes. 

\2 Medicare home health includes skilled nursing and therapy
services, which are shorter term, and a significant proportion of
services that can be used for long-term support. 


   SPENDING FOR THE ELDERLY'S
   LONG-TERM CARE EXCEEDED $90
   BILLION IN 1995
---------------------------------------------------------- Chapter 0:1

Spending for the elderly's long-term care was $91 billion, or about
$12,000 per disabled elderly person, in 1995, the last year for which
data on expenditures from all sources are available.  The elderly and
their families represent the largest single group of purchasers of
long-term care, spending almost $36 billion dollars out of pocket, or
almost 40 percent of the total $91 billion expenditures for long-term
care.  (See table 1 for expenditures and fig.  1 for percentages by
funding source.) This spending does not include the substantial
unpaid support provided to the elderly by family and friends. 
Studies have found that about 65 percent of disabled elderly living
in the community rely exclusively on unpaid sources for their care. 
Public funding for long-term care comes primarily from Medicaid,
which finances almost one-third of long-term care--$28.5 billion in
1995--and Medicare, which funds one-fourth--$22.7 billion.\3
Long-term care expenditures for the elderly are disproportionately
used to purchase nursing home care; about 70 percent of total elderly
long-term care expenditures are for nursing homes. 



                          Table 1
          
          1995 Expenditures for Long-Term Care for
                        the Elderly

                   (Dollars in Billions)

Funding source    Nursing home     Home care         Total
----------------  ------------  ------------  ------------
Out-of-pocket            $30.0          $5.5         $35.5
Medicaid                  24.2           4.3          28.5
Medicare                   8.4          14.3          22.7
Other public               1.3           2.2           3.5
 sources
Private                    0.4           0.3           0.7
 insurance
==========================================================
Total                    $64.3         $26.6         $90.9
----------------------------------------------------------
Source:  CRS. 

   Figure 1:  Distribution of 1995
   Expenditures for Long-Term Care
   for the Elderly, by Funding
   Source

   (See figure in printed
   edition.)

Source:  GAO analysis of CRS data. 


--------------------
\3 Medicaid, a joint federal-state health financing program for
low-income families and blind, disabled, and elderly people, is
authorized under title XIX of the Social Security Act and is
administered by the states under the general oversight of the Health
Care Financing Administration (HCFA).  Medicare is a health insurance
program that covers virtually all the elderly, authorized by title
XVIII of the Social Security Act.  The federal share of a state's
total Medicaid expenditures can range from 50 to 83 percent; Medicare
home health care is almost totally financed by federal funds. 


   AGING BABY BOOMERS WILL EXPAND
   DEMAND FOR LONG-TERM CARE
---------------------------------------------------------- Chapter 0:2

The baby boom generation, about 76 million people born between 1946
and 1964, will contribute to rapid growth in the number of elderly
individuals who need long-term care and the resources required to pay
for it.  Forecasts of the exact number who will need such care are
uncertain because of differing conclusions about the effect of better
health care and lifestyles on the subpopulation that may eventually
need long-term care.  Nevertheless, the number will be very large
even if the most rosy scenario prevails. 

Today's elderly make up about 13 percent of the total population. 
The number of individuals aged 65 and over will make up about 20
percent of the total population in 2030, when the first of the baby
boomers will reach their 85th birthday.\4 From 1997 to 2030,
individuals 85 and older, the most rapidly growing age group and the
group most likely to require long-term care, will more than
double--from about 3.9 million to about 8.5 million individuals--and
by 2050 will more than double again--to about 18 million
individuals.\5 (See fig.  2 for the distribution of the elderly in
1997, 2030, and 2050.)

   Figure 2:  Census Bureau
   Estimates of Number of Elderly
   Individuals in 1997, 2030, and
   2050

   (See figure in printed
   edition.)

Source:  U.S.  Bureau of the Census, March 1996 and February 1998. 

Nearly a quarter of the nation's elderly population--an estimated 7.3
million in 1994 --require some assistance with either activities of
daily living (ADL) or instrumental activities of daily living (IADL),
or both.\6 Almost 80 percent of these 7.3 million elderly live at
home or in other community-based settings, and about 30 percent of
them are severely disabled, requiring assistance with at least three
ADLs or needing substantial supervision because of cognitive
impairment or other behavioral problems.  About 22 percent--or 1.6
million--live in nursing homes.  An estimated 1 million individuals
live in residential settings that have services available, such as
assisted living facilities.  Experts agree that population aging will
increase the number of disabled elderly needing long-term care over
the next several decades, but no consensus exists on the size of that
increase.  While the sheer number of baby boomers is expected to
drive up demand for long-term care services, projections of the
number of elderly needing long-term care in the next century vary
because of different assumptions about the future prevalence of
disability. 

Predicting the magnitude and composition of the growth in the elderly
needing long-term care services is complicated by several factors. 
Some researchers argue that medical advances have increased life
expectancy but have not changed the onset of illness.  They predict
that declining death rates may actually increase the need for
long-term care if more people live to develop age-related disabling
conditions or live longer with existing disabilities.  Others argue
that disability is becoming increasingly compressed into a shorter
portion of the lifespan, decreasing the number of years long-term
care is needed.  Improved treatments or prevention of common
disabling conditions among the elderly, such as strokes and
arthritis, could lessen long-term care need, independent of death
rates. 

Nonetheless, recent forecasts of the number of disabled baby boomers
who will need long-term care have been developed but differ widely,
ranging from 2 to 4 times the current number of disabled elderly. 
How this will translate into the need for long-term care services and
actual spending will depend on the public and private resources
devoted to purchasing long-term care. 


--------------------
\4 The prevalence of chronic health conditions increases with age. 
Disability also increases with age, and the prevalence of disability
increases markedly at advanced ages.  Those aged 85 and older have
almost double the rate of disability of those aged 65 to 74. 

\5 U.S.  Bureau of the Census, Resident Population of the United
States:  Estimates, by Age and Sex, Feb.  6, 1998; Bureau of the
Census, Resident Population of the United States:  Middle Series
Projections, 2015 to 2030, by Age and Sex, Mar.  1996; and Bureau of
the Census, Resident Population of the United States:  Middle Series
Projections, 2035 to 2050, by Age and Sex, Mar.  1996. 

\6 The need for long-term care is frequently measured by assessing
limitations in an individual's ability to manage certain functions or
activities that are basic for self-care.  ADLs include bathing,
dressing, toileting, getting in and out of a chair or bed, and
eating; IADLs describe difficulty in performing household chores or
social tasks and include taking medicine, preparing meals, cleaning,
grocery shopping, and money management. 


   SHIFTS IN MEDICAID AND MEDICARE
   FUNDING OF LONG-TERM CARE
   COMPLICATE PROJECTIONS
---------------------------------------------------------- Chapter 0:3

How the increased long-term care needs of the baby boom generation
will be met or financed is uncertain.  The past 2 decades have seen
change in the types of long-term care services used by the elderly
and in who paid for these services.  The change has occurred in large
part because of shifts in Medicare and Medicaid coverage as well as
private purchases of long-term care.  We still are experiencing
considerable change, which makes it extremely difficult to project
what type of services the baby boomers will need and who will pay for
them. 

Historically, the vast majority of long-term care was supplied in
nursing homes or at home by family members and friends.  Nursing home
care was financed almost equally by residents' own resources and
state Medicaid programs.  Over the past 15 years, there has been a
substantial increase in the number of people receiving paid services
at home and relying less on nursing homes.  A major contributor to
this trend has been increased use of Medicaid-financed home care
following passage of home and community-based waiver provisions in
1981.  In addition, since 1989, Medicare expenditures for home care
have grown rapidly. 


      MEDICAID, LARGEST PUBLIC
      FUNDER OF LONG-TERM CARE,
      CONTINUES TO EXPAND HOME
      CARE
-------------------------------------------------------- Chapter 0:3.1

Medicaid is the largest public funder of long-term care.  Most of
Medicaid expenditures are for nursing home care, but in the past 15
years there has been a shift to home care.  The result is a
significant change in the proportion of people with the need for
long-term care who are receiving Medicaid-financed services and in
the average cost of those services. 

State Medicaid programs have, by default, become the major form of
insurance for long-term care, but only after individuals have become
impoverished by "spending down" their assets.  Medicaid long-term
care spending for many of the elderly results from Medicaid coverage
of people who have become poor as the result of depleting assets to
pay for nursing home care, the average costs of which exceed $40,000
per year.  In most states, nursing home residents without a spouse
cannot have more than $2,000 in countable assets before becoming
eligible for Medicaid coverage of their care.\7

About two-thirds of nursing home residents in 1994 relied on Medicaid
to help pay for their care.  Slightly more than 25 percent of
Medicaid nursing home residents were admitted as private pay
residents.  Both multiple nursing home stays and lengths of stay
affect whether a private pay resident spends down to Medicaid
eligibility.  For example, more than one-half of residents who
entered as private pay residents and who have been in the nursing
home 3 to 5 years are on Medicaid. 

Traditionally, states emphasized nursing home care.  In attempts to
control their long-term costs, states imposed controls on the number
of nursing home beds.  They required assessment and screening of
prospective residents to ensure that Medicaid financed nursing home
care for the people who were most disabled.  Some states also
implemented payment systems to provide these facilities incentives to
admit and care for the more disabled and higher cost residents. 

States limited eligibility for home care out of concern about the
potential cost of covering services for the large number of disabled
who were cared for by their families at home.  However, as part of
the Omnibus Budget Reconciliation Act of 1981 (P.L.  97-35), the
Congress established the home and community-based service waiver
program:  section 1915(c) of the Social Security Act gave states the
option of applying for Medicaid waivers to fund home and
community-based services for people who meet Medicaid eligibility
requirements.  These waivers gave states the ability to restrict the
number and costs of eligible individuals.  As states have become more
experienced with the waivers and confident of their ability to manage
these programs, they have expanded their financing of home and
community-based care.  All states now have home and community-based
waivers, and over 200 waiver programs serve more than 250,000
individuals nationwide.\8 Medicaid expenditures for home and
community-based waivers have increased an average of 32.7 percent per
year from 1987 to 1996, reaching a level of $5.8 billion in 1996. 

States have used home and community-based waiver services not just to
serve additional people at home, but to reduce reliance on nursing
homes.  In an earlier report, we found that three states we reviewed
had restricted construction of new nursing home beds as they financed
more home care services.\9 According to the National Academy for
State Health Policy, 27 states provide waiver services in assisted
living or board and care facilities.\10 Such settings may provide an
alternative to nursing homes for someone whose care needs or family
resources make it difficult to stay at home. 

As they address the challenges identified with providing long-term
care, states are expected to increasingly focus on Medicaid-funded
care provided in the beneficiary's home or a community-based setting
rather than expanding long-term care in nursing homes.  Spending on
home care in 1996 increased about 24 percent in comparison to the
3-percent increase in the overall program.  According to the National
Academy for State Health Policy, seven more states plan to expand
home care to community-based residential settings, such as assisted
living or board and care facilities.  In the last 5 years, a number
of states also have created forums to consider the direction and
financing of long-term care--the National Conference of State
Legislatures reports that at least 23 states have formed task forces
or study commissions on this issue. 


--------------------
\7 Countable assets generally refer to liquid assets, excluding such
things as a primary residence of any value and an automobile with a
market value of $4,500 or less. 

\8 Forty-nine of the fifty states have at least one home and
community-based waiver.  Arizona, the fiftieth state, has a program
that functions similarly to such a waiver program. 

\9 See Medicaid Long-Term Care:  Successful State Efforts to Expand
Home Services While Limiting Costs (GAO/HEHS-94-167, Aug.  11, 1994). 

\10 Assisted living facilities are similar to other residential
facilities, such as board and care facilities, that offer housing,
meals, protective oversight, and personal care to people with
physical or cognitive disabilities.  Unlike nursing homes or many
board and care settings, however, assisted living facilities attempt
to provide residents with greater autonomy and control over their
living and service arrangements. 


      NEW PAYMENT SYSTEM MAY
      REDUCE MEDICARE'S DE FACTO
      LONG-TERM CARE FINANCING
-------------------------------------------------------- Chapter 0:3.2

Since 1989, Medicare has become the largest funder of long-term home
care, financing $14.3 billion in care--or more than half of the home
care purchased for the elderly in 1995.  A new home health payment
system, mandated by the Balanced Budget Act of 1997, however, may
reduce the amount of long-term home care financed by Medicare. 

Medicare traditionally had focused on acute care and consequently
paid very little for long-term care.  However, legislative and court
decisions and consequent changes in guidelines have essentially
transformed the home health benefit from one focused on patients
needing short-term care after hospitalization to one that serves
chronic, long-term care patients as well.\11 As a result, Medicare,
on a de facto basis, has financed an increasing amount of long-term
care through its home health care benefit. 

The increase in Medicare home health care use has been dramatic. 
Emerging trends in home health use suggest that Medicare is covering
long-term care for increasing numbers of beneficiaries, rather than
just skilled home health care.  Both the number of beneficiaries
receiving home health care and the number of visits per user more
than doubled from 1989 to 1996.\12 A small but significant proportion
of users receive extensive long-term support primarily from home
health aides.  The share of visits supplied by home health aides
increased from about 25 percent of all home health visits in 1988 to
almost 50 percent in 1995.  At the same time, home health users
without a prior hospitalization accounted for about one-third of all
users in 1993.  Figure 3 shows the growth of Medicare home health
care expenditures and highlights major policy changes. 

   Figure 3:  Medicare Home Health
   Expenditures, 1980-96

   (See figure in printed
   edition.)

Notes:  ESRD = end-stage renal disease.

The Omnibus Budget Reconciliation Act of 1980 removed both the
requirement that a beneficiary be hospitalized for 3 days in the year
prior to receiving home health care and the 100-visits-per-year
limitation. 

Source:  HCFA's Office of the Actuary. 

Medicare's role could shift significantly as a result of the Balanced
Budget Act.  The Balanced Budget Act will change the way that
Medicare home health care is reimbursed from a cost-based per-visit
payment system to a case-mix-adjusted prospective payment system in
1999.  How this system will be designed to reflect differences in
home health care needed by individuals with various disabilities and
what incentives the system creates will have major implications for
the amount of future Medicare funding for long-term care. 


--------------------
\11 To qualify for Medicare home health care, a beneficiary must be
confined to his or her residence (that is, "homebound"); require
intermittent skilled care from a qualifying service--skilled nursing,
physical therapy, or speech therapy; and be under the care of a
physician, with the services furnished under a plan of care
prescribed and periodically reviewed by a physician.  If these
conditions are met, Medicare will pay for additional qualifying
services and home health aide, occupational therapy, and medical
social service visits.  Beneficiaries are not liable for any
coinsurance or deductibles for home health services, and there is no
limit on the number of visits for which Medicare will pay. 

\12 Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 


   SLOW GROWTH OF LONG-TERM CARE
   INSURANCE RAISES QUESTIONS
   ABOUT THE EXTENT OF PRIVATE
   SUPPORT
---------------------------------------------------------- Chapter 0:4

The baby boomers, in general, are expected to be wealthier in
retirement than their parents.\13 Those who are single or less
educated, or who do not own homes, however, may not do as well.  At
the same time that many baby boomers will have greater financial
resources, they will have fewer social resources, since this
generation has remained single longer and had fewer children.  As a
result, a smaller proportion of this generation will have a spouse or
adult children to provide unpaid caregiving.  Geographic dispersion
of families and the large percentage of women who work outside the
home also may reduce the number of unpaid caregivers available to
elderly baby boomers, creating more need for purchased services. 

While many baby boomers will have more financial resources in
retirement than their parents, what might be more important is
whether they have insurance.  Private long-term care insurance has
been seen as a means of reducing the catastrophic financial risk for
people needing long-term care, and relieving some of the financing
burden currently falling on public programs.  Some observers also
believe private long-term care insurance could provide individuals
greater choice in selecting services to satisfy their long-term care
needs.  Nevertheless, a very small proportion of the elderly or
near-elderly have purchased long-term care insurance during the past
10 years.  Concern exists that consumers are not knowledgeable about
their risk for needing long-term care and about the limitations on
Medicare and Medicaid long-term care coverage, and that this lack of
awareness decreases demand for long-term care insurance.  Questions
also remain about the affordability of policies for the majority of
elderly people and the value of the coverage relative to the premiums
being charged. 

Private long-term care insurance is a relatively new product with a
growing market.  In 1986, approximately 30 insurers were selling
long-term care insurance policies of some type, and an estimated
200,000 people had purchased these policies.  The Health Insurance
Association of America (HIAA) has found that by 1995 125 insurers
were offering long-term care insurance policies, and more than 4
million policies had been sold.  Many fewer individuals had coverage,
since many policies sold did not remain in force as individuals
stopped paying premiums or dropped one policy to purchase another.\14

Long-term care insurance financed less than 1 percent of long-term
care in 1995. 

Long-term care insurance is still struggling to gain a greater market
share.  A recent survey of the elderly and near-elderly found that
only about 40 percent believe that they or their family will be
responsible for paying for their long-term care.\15 HIAA reports that
the industry expects continued growth, however, and that the "tax
deductibility" of qualified policies will help accelerate that
growth.\16

The affordability of long-term care insurance will have a large
impact on its market share.  Assessments of the ability of private
long-term care insurance to provide coverage to a majority of people
who will need long-term care are pessimistic.  HIAA reports that in
1995 policies paying $100 a day for nursing home care and $50 a day
for home health care averaged annual premiums of $1,881 when
purchased at the age of 65 and $5,889 when purchased at the age of
79.\17 Long-term care insurance, then, is most affordable for middle-
and upper-income individuals.  One recent study estimates that the
proportion of elderly who can afford long-term care insurance ranges
from 10 to 20 percent.\18

Not only is the cost of long-term care insurance a problem for the
elderly and near-elderly, but questions also remain about the value
of the coverage relative to the premiums being charged.  Individuals
who consider and decide against purchasing long-term care insurance
indicate skepticism about the policies' providing adequate
coverage.\19

Also, as insurers have better understood their risks and competition
has increased, premiums have decreased.  Some potential purchasers
may defer purchase of long-term care insurance because they expect a
"better buy" in the future--that is, improved coverage at less cost. 

We have reported on a number of problems in the long-term care
insurance market--including 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 reduce incentives for marketing abuses.\20 By the end
of 1996, all 50 states had adopted laws and regulations pertaining to
long-term care insurance, and 38 states had adopted at least one-half
of the provisions of the 1996 National Association of Insurance
Commissioners (NAIC) Long-Term Care Insurance Model Act.  The Health
Insurance Portability and Accountability Act requires that long-term
care insurance policies written after December 1996 meet requirements
of NAIC Long-Term Care Insurance Model Act to qualify as
tax-deductible.  This requirement adds to consumers' protection. 


--------------------
\13 This prediction depends on the assumption that real wages will
continue to grow and that Social Security, private pensions, and
health expenditures will remain stable. 

\14 We found that insurance companies we reviewed expected about 20
percent of long-term care insurance policies to lapse during the
first year of ownership and about half of all policies to lapse
within 5 years.  See Health Care Reform:  Supplemental and Long-Term
Care Insurance (GAO/T-HRD-94-58, Nov.  9, 1993). 

\15 M.A.  Cohen and A.K.  Nanda Kumar, "The Changing Face of
Long-Term Care Insurance in 1994:  Profiles and Innovations in a
Dynamic Market," Inquiry, Vol.  34 (spring 1997), pp.  50-61. 

\16 Section 321 of the Health Insurance Portability and
Accountability Act of 1996, P.L.  104-191, 110 Stat.  2054, amends
the tax code to treat private long-term care policy and long-term
care expenses the way health insurance policy and other health care
expenses are treated under the code.  The portion of such expenses
that exceeds 7.5 percent of adjusted gross income is deductible. 
Private long-term care policy and long-term care expenses can now be
included in calculating the amount of this deduction.  However,
aged-based limitations were established on the amount of these policy
premiums that may be included in calculating this deduction.  For
example, individuals aged 51 to 60 are limited to including no more
than $750 of these premiums. 

\17 These policies have lifetime 5-percent compounded inflation
protection and a 20-day deductible period; adding nonforfeiture
benefits increases average annual premiums to $2,560 for 65-year-olds
and $8,146 for 79-year-olds. 

\18 "Long-Term Care Insurance Special Report:  How Will You Pay for
Your Old Age?" Consumer Reports (Oct.  1997), pp.  35-50. 

\19 Cohen and Kumar, "The Changing Face of Long-Term Care Insurance
in 1994," 1997. 

\20 GAO/T-HRD-94-58, Nov.  9, 1993. 


-------------------------------------------------------- Chapter 0:4.1

In conclusion, even though we cannot know the exact numbers of the
baby boom generation who will require long-term care services, we do
know that the aging of the baby boomers will lead to a tremendous
increase in the elderly population in the next 3 decades and an even
larger increase in the 85-and-over population who are more likely to
use long-term care services.  Financing these services will be a
challenge for the baby boomers, their families, and federal and state
governments. 

Mr.  Chairman, this concludes my statement.  I would be happy to
answer any questions you or Members of the Committee might have at
this time. 

RELATED GAO PRODUCTS

Long-Term Care:  Consumer Protection and Quality-of-Care Issues in
Assisted Living (GAO/HEHS-97-93, May 15, 1997). 

Medicare Post-Acute Care:  Home Health and Skilled Nursing Facility
Cost Growth and Proposals for Prospective Payment (GAO/T-HEHS-97-90,
Mar.  4, 1997). 

Medicare:  Home Health Utilization Expands While Program Controls
Deteriorate (GAO/HEHS-96-16, Mar.  27, 1996). 

Long-Term Care:  Current Issues and Future Directions
(GAO/HEHS-95-109, Apr.  13, 1995). 

Long-Term Care:  Diverse, Growing Population Includes Millions of
Americans of All Ages (GAO/HEHS-95-26, Nov.  7, 1994). 

Medicaid Long-Term Care:  Successful State Efforts to Expand Home
Services While Limiting Costs (GAO/HEHS-94-167, Aug.  11, 1994). 

Health Care Reform:  Supplemental and Long-Term Care Insurance
(GAO/T-HRD-94-58, Nov.  9, 1993). 

Long-Term Care Insurance:  High Percentage of Policyholders Drop
Policies (GAO/T-HRD-93-129, Aug.  25, 1993). 

Long-Term Care Insurance:  Risks to Consumers Should Be Reduced
(GAO/T-HRD-91-14, Dec.  26, 1991). 

Long-Term Care Insurance:  Consumers Lack Protection in a Developing
Market (GAO/T-HRD-92-5, Oct.  24, 1991). 


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