[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Appendices]
[Appendix B. Health Status, Insurance, and Expenditures of the Elderly, and Background Data on Long-Term Care]
[From the U.S. Government Printing Office, www.gpo.gov]






 
[1996 Green Book] APPENDIX B. HEALTH STATUS, INSURANCE, AND EXPENDITURES OF THE ELDERLY, AND BACKGROUND DATA ON LONG-TERM CARE

                                CONTENTS

Health Status
Causes of Death for the Elderly
Medicare Reimbursement and Out-of-Pocket Liabilities of the 
        Elderly
Changes in Real Spending Per Medicare Enrollee, 1967-2005
Supplementary Medical Insurance Coverage of the Elderly
Background Data on Long-Term Care
  The Long-Term Care Population
  Paying for Long-Term Care Services
  Private Long-Term Care Insurance
References

    Although the health status of the elderly has improved in 
recent decades, many elderly persons have conditions that 
require medical and long-term health care. In 1993, total 
spending on long term care for the elderly was around $79 
billion (Price, 1996). Most persons 65 years or older have some 
form of health insurance. About 97 percent are covered by 
Medicare or Medicaid, and nearly 35 percent are insured under a 
union or employer's group health insurance (Smith & Nuschler, 
1994). This appendix reports on the health status, health 
insurance, and health care expenditures of the elderly.

                             HEALTH STATUS

    By various measures, the health status of the elderly 
population has been gradually improving over the years. For 
example, life expectancy at age 65 has increased from 13.9 
years in 1950 to 17.5 years in 1992 (see table B-1). Although 
advance data from the National Center for Health Statistics 
(1996) indicates that life expectancy for the general 
population declined by 0.3 years in 1993, the first decrease 
since 1980, the overall trend this century has been an upward 
one. Improvements in life expectancy, as measured by declines 
in mortality rates, have been greater for females than for 
males. Some morbidity indicators, such as the incidence of high 
blood pressure, improved among those aged 65 to 74 years in the 
1970s and 1980s (see table B-2). However, the proportion of 
overweight seniors seems to be increasing.

       TABLE B-1.--LIFE EXPECTANCY AT BIRTH AND AT 65 YEARS OF AGE BY SEX AND RACE, SELECTED YEARS 1950-92      
                                      [Remaining life expectancy in years]                                      
----------------------------------------------------------------------------------------------------------------
                                                         At birth             At 65 years \1\        At birth   
                                                 ---------------------------------------------------------------
                      Year                         Both                    Both                                 
                                                   sexes   Male   Female   sexes   Male   Female   White   Black
----------------------------------------------------------------------------------------------------------------
1950............................................    68.2    65.6    71.1    13.9    12.8    15.0    69.1    60.7
1960............................................    69.7    66.6    73.1    14.3    12.8    15.8    70.6    63.2
1970............................................    70.8    67.1    74.8    15.2    13.1    17.0    71.7    64.1
1980............................................    73.7    70.0    77.4    16.4    14.1    18.3    74.4    68.1
1988............................................    74.9    71.4    78.3    16.9    14.7    18.6    75.6    69.2
1989............................................    75.1    71.7    78.5    17.1    15.0    18.8    75.9    69.2
1990............................................    75.4    71.8    78.8    17.2    15.1    18.9    76.1    69.1
1991............................................    75.5    72.0    78.9    17.4    15.3    19.1    76.3    69.3
1992............................................    75.8    72.3    79.1    17.5    15.4    19.2    76.5    69.6
----------------------------------------------------------------------------------------------------------------
\1\ Includes deaths of nonresidents of the United States in the 1950 and 1960 data.                             
                                                                                                                
Source: National Center for Health Statistics (1996, p. 11); National Center for Health Statistics (1995a).     


  TABLE B-2.--SELECTED HEALTH STATUS INDICATORS FOR PERSONS 65-74 YEARS OF AGE BY SEX, SELECTED PERIODS 1971-91 
                                             [Percent of population]                                            
----------------------------------------------------------------------------------------------------------------
                                                                       Male                      Female         
                  Health status indicator                  -----------------------------------------------------
                                                            1971-74  1976-80  1988-91  1971-74  1976-80  1988-91
----------------------------------------------------------------------------------------------------------------
Hypertension \1\ \2\......................................     67.2     67.1     59.0     78.3     71.8     57.8
High-risk serum cholesterol levels (Mean serum cholesterol                                                      
 level, \3\ in mg/dL).....................................     34.7                                             
                                                              (226)     31.7                                    
                                                                       (221)     27.7                           
                                                                                (218)     57.7                  
                                                                                         (250)     51.6         
                                                                                                  (246)     43.2
                                                                                                           (234)
Overweight \4\............................................     23.0     25.2     42.9     38.0     38.4     36.8
----------------------------------------------------------------------------------------------------------------
\1\ Excludes pregnant women.                                                                                    
\2\ Hypertension or elevated blood pressure is defined as either systolic pressure of at least 140 mmHg or      
  diastolic pressure of at least 90 mmHg or both. If the respondent is taking antihypertensive medication, he or
  she is considered hypertensive.                                                                               
\3\ High-risk serum cholesterol levels are defined as greater or equal to 240 mg/dL (6.20 mmol/L), risk level as
  defined by the National Cholesterol Education Program Expert Panel on Detection, Evaluation, and Treatment of 
  High Cholesterol in Adults, November 1987.                                                                    
\4\ Overweight is defined for men as body mass index greater than or equal to 27.8 kilograms/meter\2\, and for  
  women as body mass index greater than or equal to 27.3 milograms/meter\2\. These cut points were used because 
  they represent the sex-specific 85th percentiles for persons 20-29 years of age in the 1976-80 National Health
  and Nutrition Examination Survey.                                                                             
                                                                                                                
Note.--Data are based on physical examinations of a sample of the civilian, noninstitutionalized population.    
                                                                                                                
Source: National Center for Health Statistics (1995a, pp. 163-5).                                               

    Despite the trend toward improved health status among the 
elderly, their needs for medical and long-term care services 
are substantial and growing. Many of the elderly have one or 
more chronic conditions, many of which give rise to the need 
for continuing health care. Table B-3 shows the incidence of 
several common chronic conditions among the elderly. Half 
report having arthritis, about 36 percent report high blood 
pressure, and over 30 percent report heart disease. The 
incidence of many chronic conditions is directly related to age 
and inversely related to family income.

        TABLE B-3.--SELECTED CHRONIC CONDITIONS PER 1,000 ELDERLY PERSONS BY AGE AND FAMILY INCOME, 1994        
----------------------------------------------------------------------------------------------------------------
                                                    Age                          Family income                  
                                             -------------------------------------------------------------------
         Chronic condition             All                      Less                                     $35,000
                                     elderly   65-74  75 and    than   $10,000-$19,999  $20,000-$34,999    and  
                                                       over   $10,000                                      over 
----------------------------------------------------------------------------------------------------------------
Arthritis..........................      502     477     537      651          549              509          416
Cataracts..........................      166     113     242      243          200              166          135
Hearing impairment.................      286     235     360      287          337              319          274
Deformity or orthopedic impairment.      166     154     182      208          202              165          147
Hernia of abdominal cavity.........       64      63      66       52           64               90           58
Diabetes...........................      101     102     101      134          112               88           80
Heart disease......................      325     281     387      477          307              349          309
High blood pressure \1\............      364     347     388      525          352              372          326
Emphysema..........................       46      47      43       49           51               44           41
----------------------------------------------------------------------------------------------------------------
\1\ As self-reported in the 1994 National Health Interview Survey; the higher 1988-91 hypertension data in table
  B-2 are from physical examination of a sample population. Overall self-reported hypertension fell between 1991
  and 1994.                                                                                                     
                                                                                                                
Source: National Center for Health Statistics (1995c, pp. 81-2; 87-90).                                         

    Self-assessed health is a common method used to measure 
health status, with responses ranging from ``excellent'' to 
``poor.'' Nearly 72 percent of elderly people living in the 
community describe their health as excellent, very good, or 
good, compared with others their age; only 28 percent report 
that their health is fair or poor (see table B-4).
    Family income is directly related to the elderly people's 
perception of their health. Income level is also strongly 
correlated with morbidity and mortality, lending credibility to 
the use of this measure as an assessment tool (Angell, 1993). 
In 1994, about 49 percent of older people with incomes over 
$35,000 described their health as excellent or very good, 
compared to others their age, while only 29 percent of those 
with low incomes (less than $10,000) reported excellent or very 
good health.

                    CAUSES OF DEATH FOR THE ELDERLY

    In the United States, almost 7 out of every 10 elderly 
persons die from heart disease, cancer, or stroke (National 
Center for Health Statistics, 1996). Heart disease was the 
major cause of death in 1960, and remains so today even though 
there have been rapid declines in age-adjusted death rates from 
heart disease, with females accounting for more of the decline. 
Overall age-adjusted death rates from cancer, however, continue 
to rise slightly in comparison to heart disease (National 
Center for Health Statistics, 1995). In 1993, however, heart 
disease still accounted for 37 percent of all deaths among 
persons 65+, while cancer accounted for 22 percent of all 
deaths in this age group. The third leading cause of death 
among the elderly--stroke (cerebrovascular disease)--has been 
decreasing over the past 30 years. In 1993, cerebrovascular 
disease accounted for only 8 percent of all deaths in the 65+ 
age group (table B-5).

                  TABLE B-4.--SELF-ASSESSED HEALTH STATUS OF THE ELDERLY BY FAMILY INCOME, 1994                 
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                              Self-assessed health status \2\   
                                                              All persons --------------------------------------
                       Characteristic                             \1\                  Very                     
                                                              (thousands)  Excellent   good   Good   Fair   Poor
----------------------------------------------------------------------------------------------------------------
All persons 65+ years \3\...................................     31,792       15.7     23.0   33.4   18.4    9.6
Gender:                                                                                                         
    Men.....................................................     12,932       16.7     22.6   32.2   18.3   10.2
    Women...................................................     18,094       14.9     23.3   34.2   18.4    9.1
Family income:                                                                                                  
    Under $10,000...........................................      4,067       10.7     17.8   30.8   23.9   16.8
    $10,000-$19,999.........................................      7,226       13.6     21.6   34.4   19.6   10.8
    $20,000-$34,999.........................................      6,741       16.4     25.5   34.7   16.8    6.6
    $35,000 and over........................................      5,148       22.5     26.9   32.7   12.8    5.1
----------------------------------------------------------------------------------------------------------------
\1\ Includes unknown health status.                                                                             
\2\ The categories related to this concept result from asking the respondent, ``Would you say health is         
  excellent, very good, good, fair, or poor?'' As such, it is based on the respondent's opinion and not directly
  on any clinical evidence.                                                                                     
\3\ Includes unknown family income.                                                                             
                                                                                                                
Note.--Percentages may not add to 100 percent due to rounding. Data are based on household interviews of the    
  civilian, noninstitutionalized population.                                                                    
                                                                                                                
Source: National Center for Health Statistics (1995c, Table 70).                                                

    Table B-5 shows the 10 leading causes of death for three 
subgroups of the older population. The factors which have led 
to reductions in mortality may not necessarily lead to overall 
improvements in health status. If Americans continue to live 
only to about age 85, control of life-threatening disease could 
produce a healthier older population. If the lifespan is 
increased dramatically in future years beyond age 85, the onset 
of illness may only be delayed, without an actual shortening of 
the period of illness. Some demographers, in looking at the 
reductions in the projected percentage of those 65 and above 
who are disabled, are predicting that older people will not 
only have increasing longevity, but a later life with less 
dependency (Kolata, 1996). It should be noted that living 
longer seems to be the demographic trend, and it is not known 
what the tradeoffs may be in cost of care and quality of life.

   TABLE B-5.--DEATH RATES FOR TEN LEADING CAUSES OF DEATH AMONG OLDER  
                           PEOPLE BY AGE, 1993                          
            [Death rates per 100,000 population in age group]           
------------------------------------------------------------------------
                                                    Age                 
         Cause of death          ---------------------------------------
                                     65+      65-74     75-84      85+  
------------------------------------------------------------------------
Diseases of the heart...........     1,891       848     2,183     6,669
Malignant neoplasms.............     1,133       876     1,367     1,808
Cerebrovascular diseases........       401       136       479     1,608
Chronic obstructive pulmonary                                           
 diseases.......................       264       168       357       494
Pneumonia and influenza.........       225        58       241     1,089
Diabetes........................       124        80       152       269
Accidents.......................        85        44       100       264
Nephritis, nephrotic syndrome,                                          
 nephrosis......................        60        26        73       210
Septicemia......................        51        21        61       186
Atherosclerosis.................        50        11        47       275
All other causes................       762       349       892     2,610
                                 ---------------------------------------
        All causes..............     5,048     2,617     5,952    15,482
------------------------------------------------------------------------
Source: National Center for Health Statistics (1996, Tables 7 and 19).  

    Alzheimer's disease (AD) death statistics appear in the 
1993 mortality statistics released by the National Center for 
Health Statistics (1996; see chart B-1). Alzheimer's has only 
been classified as a unique cause of death since 1979, so 
reported resulting death rates have been increasing rapidly 
since that year, and probably do not yet reflect the actual 
numbers of deaths attributable to the disease. Estimates of the 
prevalence of AD vary, but the National Institute on Aging 
(1995) has estimated that as of 1995 as many as 4 million 
people were afflicted with AD, and about half the persons 85 
years and older had contracted it. Given projected increases in 
longevity, by the year 2000, the 85 years and older cohort by 
itself will account for 4 million cases (Hodes, 1996). Presence 
of Alzheimer's may be masked by inability to confirm the 
diagnosis except by autopsy of brain tissue, although new 
diagnostic tools are being developed (National Institute on 
Aging, 1995). In the future, reporting of Alzheimer's disease 
as the cause of death is likely to increase, and more 
accurately reflect its true prevalence and impact.

  MEDICARE REIMBURSEMENT AND OUT-OF-POCKET LIABILITIES OF THE ELDERLY

    Tables B-6 through B-8 illustrate for 6 selected years how 
Medicare reimbursement, acute health care costs, and out-of-
pocket liabilities of Medicare enrollees have changed. The 
years chosen are 1975, 1980, 1985, 1990, 1995, and 2000 
(projected values). Constant 1995 dollar values were obtained 
using the CPI-U.
    The fastest growing component of Medicare reimbursement is 
for benefits under the Supplementary Medical Insurance (SMI) 
Program. For SMI, reimbursements increase at an annual rate of 
11.5 percent, while the growth in total costs (including 
enrollees' share of costs) is 10.8 percent (see table B-6). As 
a result, the share of SMI costs reimbursed by Medicare 
increases significantly over the period--from about 64 percent 
in 1975 to about 74 percent by 1995. The growth in Medicare's 
share is caused by the declining significance of the SMI 
deductible, so that more enrollees' costs are eligible for 
reimbursement.

 CHART B-1. DEATH RATES AMONG THE ELDERLY FROM ALZHEIMER'S DISEASE IN 
                                  1993


    Source: National Center for Health Statistics, Monthly 
Vital Statistics Report: Advance Report of Final Mortality 
Statistics, 1993, vol. 44, no. 7(S), February 29, 1996.



    In the Hospital Insurance (HI) Program, by contrast, the 
rate of growth in reimbursement is roughly comparable to the 
growth in enrollee's copayment costs. Consequently, the share 
of HI costs reimbursed by Medicare was 93 percent in both 1975 
and 1995.
    Overall, the share of costs reimbursed by Medicare has 
increased slightly. The percentage of costs paid by Medicare 
for services covered under Medicare was 82.2 percent in 1975 
and 84.9 percent in 1995 (see table B-6). The share of costs 
paid directly by enrollees is shown in the third panel of table 
B-7. Total direct costs plus Medicare reimbursement equals the 
total or 100 percent.
    In constant dollars, HI copayments increased the most 
rapidly between 1975 and 1990. However, between 1990 and 1995, 
SMI copayments and premium costs rose the most rapidly. In 
contrast, the cost to the enrollee from balance-billing has 
decreased significantly since 1985--a direct policy result of 
the participating physician program and the imposition of lower 
limits on balance billing (see table B-8 for deductible amounts 
and monthly premium amounts under Medicare).

           TABLE B-6.--REIMBURSEMENTS AND OUT-OF-POCKET COSTS UNDER MEDICARE, SELECTED YEARS 1975-2000          
                                     [Incurred costs per HI or SMI enrollee]                                    
----------------------------------------------------------------------------------------------------------------
                                                              Year                                Annual  growth
            Source             ------------------------------------------------------------------    1975-2000  
                                   1975       1980       1985       1990       1995       2000       (percent)  
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)In current dollars                                                                                           
                                                                                                                
                               ------------------------------------------------------------------               
Hospital insurance:                                                                                             
    Reimbursement.............       $466       $920     $1,570     $1,981     $3,167     $4,519             9.5
    Copayments................         34         67        119        187        250        328             9.4
                               ---------------------------------------------------------------------------------
      Total...................        500        986      1,690      2,168      3,417      4,847             9.5
                               =================================================================================
Supplementary medical                                                                                           
 insurance:                                                                                                     
    Reimbursement.............        186        399        766      1,307      1,848      2,828            11.5
    Copayments................         84        137        248        400        631        952            10.2
    Balance-billing...........         22         56         87         68         13         18            -0.8
                               ---------------------------------------------------------------------------------
      Total...................        291        592      1,101      1,775      2,492      3,798            10.8
                               =================================================================================
Total Medicare reimbursement..        651      1,318      2,336      3,288      5,015      7,347            10.2
Total costs under Medicare....        792      1,579      2,791      3,944      5,909      8,645            10.0
                               ---------------------------------------------------------------------------------
                                                                                                                
                                                                                                                
(5)In constant 1995 dollars                                                                                     
                                                                                                                
                               ------------------------------------------------------------------               
Hospital insurance:                                                                                             
    Reimbursement.............      1,263      1,703      2,226      2,310      3,167      3,907             4.6
    Copayments................         93        124        169        218        250        284             4.5
                               ---------------------------------------------------------------------------------
      Total...................      1,357      1,827      2,395      2,529      3,417      4,191             4.6
                               =================================================================================
Supplementary medical                                                                                           
 insurance:                                                                                                     
    Reimbursement.............        503        738      1,085      1,524      1,848      2,445             6.5
    Copayments................        227        254        352        467        631        823             5.3
    Balance-billing...........         60        104        124         80         13         16            -5.3
                               ---------------------------------------------------------------------------------
      Total...................        790      1,097      1,561      2,071      2,492      3,284             5.9
                               =================================================================================
Total Medicare reimbursement..      1,766      2,442      3,311      3,835      5,015      6,353             5.3
Total costs under Medicare....      2,147      2,924      3,955      4,600      5,909      7,475             5.1
Percent of costs paid by                                                                                        
 Medicare.....................       82.3       83.5       83.7       83.4       84.9       85.0             0.1
----------------------------------------------------------------------------------------------------------------
Note.--Values after 1995 are projected. The CPI-U was used to get constant dollars. HI = hospital insurance, SMI
  = supplementary medical insurance.                                                                            
                                                                                                                
Source: Congressional Budget Office.                                                                            


                       TABLE B-7.--ENROLLEE COSTS UNDER MEDICARE, SELECTED YEARS 1975-2000                      
                                     [Incurred costs per HI or SMI enrollee]                                    
----------------------------------------------------------------------------------------------------------------
                                                              Year                                Annual  growth
            Source             ------------------------------------------------------------------    1975-2000  
                                   1975       1980       1985       1990       1995       2000       (percent)  
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(6)In current dollars                                                                                           
                                                                                                                
                               ------------------------------------------------------------------               
HI copayments.................        $34        $67       $119       $187       $250       $328             9.4
SMI copayments................         84        137        248        400        631        952            10.2
Balance-Billing...............         22         56         87         68         13         18            -0.8
                               ---------------------------------------------------------------------------------
      Total direct costs......        140        260        456        656        894      1,298             9.3
Premium costs.................         80        110        186        343        553        620             8.5
                               ---------------------------------------------------------------------------------
      Total enrollee costs....        221        371        641        999      1,447      1,918             9.0
                               =================================================================================
Enrollee per capita income \1\      5,158      8,431     12,767     15,454     16,460     22,008             6.0
                               ------------------------------------------------------------------               
                                                                                                                
                                                                                                                
(6)In constant 1995 dollars                                                                                     
                                                                                                                
                               ------------------------------------------------------------------               
HI copayments.................         93        124        169        218        250        284             4.5
SMI copayments................        227        254        352        467        631        823             5.3
Balance-Billing...............         60        104        124         80         13         16            -5.3
                               ---------------------------------------------------------------------------------
      Total direct costs......        381        482        644        765        894      1,122             4.4
Premium costs.................        218        204        264        400        553        536             3.7
                               ---------------------------------------------------------------------------------
      Total enrollee costs....        599        687        908      1,165      1,447      1,659             4.2
                               =================================================================================
Enrollee per capita income \1\     13,983     15,614     18,095     18,025     16,460     19,029             1.2
                               ------------------------------------------------------------------               
                                                                                                                
                                                                                                                
(6)Percent of costs under                                                                                       
 Medicare paid by enrollees,                                                                                    
 by source of payment                                                                                           
                                                                                                                
                               ------------------------------------------------------------------               
HI copayments.................        4.4        4.2        4.3        4.7        4.2        3.8            -0.5
SMI copayments................       10.6        8.7        8.9       10.1       10.7       11.0             0.2
Balance-Billing...............        2.8        3.6        3.1        1.7        0.2        0.2            -9.9
                               ---------------------------------------------------------------------------------
      Total direct costs......       17.7       16.5       16.3       16.6       15.1       15.0            -0.7
Premium costs.................       10.2        7.0        6.7        8.7        9.4        7.2            -1.4
      Total...................       27.9       23.5       23.0       25.3       24.5       22.2            -0.9
Enrollee-paid costs as a                                                                                        
 percent of enrollee per                                                                                        
 capita income \1\............        4.3        4.4        5.0        6.5        8.8        8.7             2.9
----------------------------------------------------------------------------------------------------------------
\1\ From the Current Population Survey, with income adjusted for underreporting.                                
                                                                                                                
Note.--Values after 1995 are projected. The CPI-U was used to calculate constant dollars. HI = hospital         
  insurance, SMI = supplementary medical insurance.                                                             
                                                                                                                
Source: Congressional Budget Office.                                                                            


                TABLE B-8.--COPAYMENT AND PREMIUM VALUES UNDER MEDICARE, SELECTED CALENDAR YEARS                
----------------------------------------------------------------------------------------------------------------
                                                                            Year                         Annual 
                                                      ------------------------------------------------   growth 
                                                                                                       1975-2000
                                                        1975    1980    1985    1990    1995    2000   (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)In current dollars                                                                                           
----------------------------------------------------------------------------------------------------------------
Hospital insurance:                                                                                             
    Hospital deductible..............................     $92    $180    $400    $592    $716    $868        9.4
Supplementary medical insurance:                                                                                
    Annual deductible................................      60      60      75      75     100     100        2.1
    Monthly premium \1\..............................    6.70    9.20   15.50   28.60   46.10   51.70        8.5
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)In constant 1995 dollars                                                                                     
----------------------------------------------------------------------------------------------------------------
Hospital insurance:                                                                                             
    Hospital deductible..............................     249     333     567     690     716     751        4.5
Supplementary medical insurance:                                                                                
    Annual deductible................................     163     111     106      87     100      86       -2.5
    Monthly premium \1\..............................   18.16   17.04   21.97   33.36   46.10   44.70       3.7 
----------------------------------------------------------------------------------------------------------------
\1\ The 1980 supplementary medical insurance monthly premium amount is the average of values for the first and  
  second halves of the year.                                                                                    
                                                                                                                
Note.--Values after 1995 are projected. The CPI-U was used to calculate constant dollars.                       
                                                                                                                
Source: Congressional Budget Office.                                                                            

    Enrollees are spending an increasing share of their income 
for health care. In 1975, about 4.3 percent of enrollees' per 
capita income went to cover their share of acute health care 
costs under Medicare. By 2000, enrollees will have to pay an 
estimated 8.7 percent of their per capita income to cover their 
share of costs (see table B-7).
    Although total direct household spending for all health 
care by elderly households as a share of household income has 
increased since the early 1970s, it has remained relatively 
stable in recent years. Chart B-2 illustrates direct household 
spending for health care as a percentage of household income 
before taxes for elderly and nonelderly households for years 
1984 through 1994. In 1994, direct household spending for 
health care as a percentage of household income for elderly 
households was 11.2 percent, on average, up slightly from 10.6 
percent in 1984. Over the same period, nonelderly households 
spent around 3.6 percent of their household income for health 
care.

CHART B-2. DIRECT HOUSEHOLD SPENDING FOR HEALTH CARE AS A PERCENTAGE OF 
             HOUSEHOLD INCOME BY TYPE OF HOUSEHOLD, 1984-92


    Source: Congressional Budget Office.

       CHANGES IN REAL SPENDING PER MEDICARE ENROLLEE, 1967-2005

    Real Medicare spending per enrollee removes the effects of 
changes in Medicare enrollment and general inflation from total 
Medicare spending (see table B-9). Since both enrollment and 
prices are almost always increasing, the growth of real per 
enrollee spending is slower than the growth of total spending. 
Overall, real spending per enrollee grew at an average annual 
rate of 7.0 percent over the 1980-85 period; the rate declined 
to 4.8 percent per enrollee over the 1990-95 period. Similarly, 
real inpatient hospital spending per enrollee grew at an annual 
rate of 6.4 percent between 1980 and 1985; the rate declined to 
2.5 percent over the 1990-95 period. The difference in these 
rates is attributable to changes in admissions per enrollee and 
real expenditures per admission. The reduction in real 
expenditures per admission reflects the impact of the 
implementation of the hospital prospective payment system.
    Costs in hospital outpatient departments have dropped 
relative to the previous trend, indicating that hospital 
inpatient costs have not simply been shifted to the outpatient 
sector. Introduction of a new payment methodology (a blend of a 
fixed rate and the hospital's costs) for certain surgical 
procedures performed in outpatient departments tended to reduce 
costs somewhat, but this effect was partially offset by the 
shift of services from the inpatient sector.
    At least some portion of growth in the volume of covered 
home health visits may represent a delayed response to an 
increasing need for skilled home care resulting from incentives 
contained within Medicare's hospital prospective payment system 
to discharge patients more quickly to their homes. During early 
years of hospital prospective payment, HCFA had in place 
medical review and claims processing policies that had resulted 
in high denial rates for provided care. These policies were 
relaxed by 1989. In addition, the 1989 revised coverage policy 
guidelines are believed to account for a large portion of the 
increase in volume because they liberalized coverage policies.
    Growth in spending for physicians' services reflects the 
fact that Medicare began paying for physicians services on the 
basis of a fee schedule beginning in 1992. Payments for 
laboratory services have been constrained by the implementation 
of tighter controls under the laboratory fee schedule.
    Spending for skilled nursing facilities (SNFs) increased 
significantly. During the period from 1975 through 1980, real 
spending per enrollee for SNFs was falling. This trend was 
reversed during the 1980s. In 1988, growth in SNF spending 
accelerated sharply because of a revision in the manual used by 
administrative agents to determine Medicare coverage that 
greatly relaxed the definition of covered care to make it 
conform with legislative language. Growth in SNF spending 
further accelerated in 1989 under provisions of the Medicare 
Catastrophic Coverage Act, which briefly eliminated the 
requirement for a hospital stay prior to a covered SNF stay and 
which reduced the copayments required of enrollees for SNF 
stays.
    Table B-9 shows Medicare spending per enrollee in constant 
1995 dollars. The first column includes both Medicare benefits 
and administration. All other columns include spending on 
benefits only.

        SUPPLEMENTARY MEDICAL INSURANCE COVERAGE OF THE ELDERLY

    Over 95 percent of the aged population is enrolled in 
Medicare. In addition, the vast majority of these persons also 
have some supplementary coverage. In 1991, an estimated 89 
percent of the Medicare population age 65 and over had 
additional coverage through private insurance, public programs, 
or both. An estimated 33 percent had employer-sponsored 
coverage; 36.8 percent had individually purchased coverage; and 
5 percent had both types of coverage. In addition, 11.9 percent 
had Medicaid protection, with an additional 2 percent reporting 
other types of coverage. Table B-10 shows that the percentage 
of elderly persons with private employer-sponsored coverage 
declines with age while those with Medicaid protection 
increases.

                                             TABLE B-9.--REAL SPENDING PER ENROLLEE, FISCAL YEARS 1967-2005                                             
                                                               [In constant 1995 dollars]                                                               
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Supplementary              Skilled    Home                          
                         Fiscal years                          Medicare   Hospital     medical      Hospital   nursing   care &    Outpatient  Physician
                                                                         insurance    insurance    inpatient  facility   hospice  departments    & lab  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7)Estimates by the Health Care Financing Administration                                                                                                
                                                              ------------------------------------------------------------------------------------------
1967.........................................................       762        553          157          528        21         5           3         153
1968.........................................................     1,146        787          311          705        72        12          10         298
1969.........................................................     1,339        932          345          849        73        14          16         325
1970.........................................................     1,359        904          385          837        56        16          19         360
1971.........................................................     1,405        963          371          917        38        14          25         340
1972.........................................................     1,494      1,026          389          989        29        14          31         353
1973.........................................................     1,463      1,013          381          977        27        14          30         346
1974.........................................................     1,520      1,033          396          994        28        20          43         344
1975.........................................................     1,740      1,212          450        1,164        32        25          63         378
1976.........................................................     1,901      1,304          507        1,248        33        35          79         415
1977.........................................................     2,066      1,421          570        1,360        33        41          94         462
1978.........................................................     2,208      1,517          608        1,455        31        46         106         486
1979.........................................................     2,284      1,550          655        1,487        29        49         116         524
1980.........................................................     2.412      1,631          706        1,568        27        52         126         565
1981.........................................................     2.607      1,766          765        1,702        24        55         137         613
1982.........................................................     2,840      1,926          841        1,839        25        66         163         675
1983.........................................................     3,018      2,012          935        1,906        28        78         179         755
1984.........................................................     3,123      2,064          982        1,951        27        87         178         802
1985.........................................................     3,384      2,260        1,042        2,142        26        94         187         853
1986.........................................................     3,441      2,212        1,151        2,095        26        92         226         923
1987.........................................................     3,532      2,151        1,305        2,042        27        84         253       1,051
1988.........................................................     3,570      2,103        1,387        1,989        29        87         266       1,119
1989.........................................................     3,685      2,171        1,427        1,995        85        93         283       1,142
1990.........................................................     3,913      2,325        1,506        2,098        99       130         304       1,199
1991.........................................................     3,883      2,257        1,544        1,999        81       180         313       1,228
1992.........................................................     4,187      2,527        1,570        2,164       117       248         345       1,223
1993.........................................................     4,392      2,700        1,610        2,235       157       312         347       1,260
1994.........................................................     4,684      2,888        1,710        2,304       202       384         388       1,319
                                                              ------------------------------------------------------------------------------------------
                                                                                                                                                        
                                                                                                                                                        
(7)Projections by the Congressional Budget Office                                                                                                       
                                                                                                                                                        
                                                              ------------------------------------------------------------------------------------------
1995.........................................................     4,950      3,077        1,790        2,375       247       455         434       1,356
1996.........................................................     5,245      3,269        1,897        2,464       285       520         468       1,429
1997.........................................................     5,510      3,425        2,006        2,540       308       577         504       1,503
1998.........................................................     5,790      3,578        2,133        2,633       322       622         543       1,590
1999.........................................................     6,050      3,715        2,256        2,722       336       657         588       1,668
2000.........................................................     6,305      3,843        2,383        2,806       349       688         636       1,747
2001.........................................................     6,564      3,968        2,517        2,889       362       717         687       1,830
2002.........................................................     6,825      4,087        2,659        2,968       374       744         741       1,919
2003.........................................................     7,112      4,210        2,823        3,054       385       771         794       2,029
2004.........................................................     7,424      4,343        3,002        3,149       395       798         846       2,156
2005.........................................................     7,748      4,477        3,192        3,248       405       824         895       2,297
                                                              ------------------------------------------------------------------------------------------
                                                                                                                                                        
                                                                                                                                                        
(7)Average annual growth rates (in percent)                                                                                                             
                                                              ------------------------------------------------------------------------------------------
1975-1980....................................................       6.8        6.1          9.5          6.1      -3.4      16.3        14.7         8.4
1980-1985....................................................       7.0        6.7          8.1          6.4      -0.7      12.5         8.3         8.6
1985-1990....................................................       2.9        0.6          7.6         -0.4      30.8       6.8        10.2         7.1
1990-1995....................................................       4.8        5.8          3.5          2.5      19.9      28.4         7.4         2.5
1995-2000....................................................       5.0        4.5          5.9          3.4       7.2       8.6         7.9         5.2
2000-2005....................................................       4.2        3.1          6.0          3.0       3.0       3.7         7.1         5.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Column 1 includes both benefit and administrative costs. All other columns include only benefits. The CPI-U was used to calculate constant       
  dollars.                                                                                                                                              
                                                                                                                                                        
Source: Congressional Budget Office.                                                                                                                    


                                  TABLE B-10.--SUPPLEMENTARY HEALTH INSURANCE COVERAGE OF MEDICARE ELDERLY BY AGE, 1991                                 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Percent                                                                             
                                                                       of                           Private    Private     Private              Medicare
                            Age group                              enrollees   Number   Medicare  individual  employer-  (individual  Medicaid     and  
                                                                     in age               only     purchase   sponsored      and                  other 
                                                                     group                                                 private)                     
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
                                                                                                                                                        
(7)Persons                                                                                                                                              
                                                                                                                                                        
                                                                  --------------------------------------------------------------------------------------
65-69 Years......................................................       29.4     8,570       954      2,817       3,553         498        676        72
70-74 Years......................................................       27.2     7,931       817      3,034       2,842         442        702        95
75-79 Years......................................................       20.0     5,840       633      2,319       1,826         264        666       131
80-84 Years......................................................       13.4     3,897       460      1,579         946         167        626       119
85 Years or over.................................................       10.1     2,938       460        975         454          96        790       164
                                                                  --------------------------------------------------------------------------------------
      Total......................................................      100.0    29,176     3,324     10,725       9,621       1,467      3,459       581
                                                                  ======================================================================================
                                                                                                                                                        
                                                                                                                                                        
(7)Percent share                                                                                                                                        
                                                                                                                                                        
                                                                  --------------------------------------------------------------------------------------
65-69 Years......................................................  .........     100.0      11.1       32.9        41.5         5.8        7.9       0.8
70-74 Years......................................................  .........     100.0      10.3       38.3        35.8         5.6        8.9       1.2
75-79 Years......................................................  .........     100.0      10.8       39.7        31.3         4.5       11.4       2.2
80-84 Years......................................................  .........     100.0      11.8       40.5        24.3         4.3       16.1       3.1
85 Years or over.................................................  .........     100.0      15.7       33.2        15.5         3.3       26.9       5.6
                                                                  --------------------------------------------------------------------------------------
      Total......................................................  .........     100.0      11.4       36.8        33.0         5.0       11.9      2.0 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Numbers in thousands. Includes Medicare persons age 65 or over who were alive during all of 1991. All numbers have relative standard errors of   
  less than 30 percent.                                                                                                                                 
                                                                                                                                                        
 Source: Chulis et al. (1993).                                                                                                                          

                   BACKGROUND DATA ON LONG-TERM CARE

    The phrase ``long-term care'' refers to a broad range of 
medical, social, personal, supportive, and specialized housing 
services needed by individuals who have lost some capacity for 
self-care because of a chronic illness or condition. Chronic 
illnesses or conditions often result in both functional 
impairment and physical dependence on others for an extended 
period of time. Major subgroups of persons needing long-term 
care include the elderly and nonelderly disabled, persons with 
developmental disabilities (primarily persons with mental 
retardation), and persons with mental illness. This section of 
appendix B focuses on the elderly long-term care population.
    The range of chronic illnesses and conditions resulting in 
the need for supportive long-term care services is extensive. 
Unlike acute medical illnesses, which occur suddenly and may be 
resolved in a relatively short period of time, chronic 
conditions last for an extended period of time and are not 
typically curable. Although chronic conditions occur in 
individuals of all ages, their incidence, especially as they 
result in disability, increases with age. These conditions may 
include heart disease, strokes, arthritis, osteoporosis, and 
vision and hearing impairments. Dementia, the chronic, often 
progressive loss of intellectual function, is also a major 
cause of disability in the elderly.
    The presence of a chronic illness or condition alone does 
not necessarily result in a need for long-term care. For many 
individuals, their illness or condition does not result in a 
functional impairment or dependence and they are able to go 
about their daily routines without needing assistance. But when 
the illness or condition results in a functional or activity 
limitation, long-term care services may be required.
    The need for long-term care by the elderly is often 
measured by assessing limitations in a person's capacity to 
manage certain functions or activities. For example, a chronic 
condition may result in dependence in certain functions that 
are basic and essential for self-care, such as bathing, 
dressing, eating, toileting, and/or moving from one place to 
another. These are referred to as limitations in ``activities 
of daily living,'' or ADLs. Another set of limitations, which 
reflect lower levels of disability, are used to describe 
difficulties in performing household chores and social tasks. 
These are referred to as limitations in ``instrumental 
activities of daily living,'' or IADLs, and include such 
functions as meal preparation, cleaning, grocery shopping, 
managing money, and taking medicine. Limitations can vary in 
severity and prevalence, so that persons can have limitations 
in any number of ADLs or IADLs, or both.
    Long-term care services are often differentiated by the 
settings in which they are provided. In general, services are 
provided either in nursing homes or in home and community-based 
care settings. Nursing home care includes a wide variety of 
services that range from skilled nursing and therapy services 
to assistance with such personal care functions as bathing, 
dressing, and eating. Nursing home services also include room 
and board.
    Home and community-based care also includes a broad range 
of skilled and personal care services, as well as a variety of 
home management activities, such as chore services, meal 
preparation, and shopping. Home care services can be provided 
formally by home care agencies, visiting nurse associations, 
and day care centers. Home care is also provided informally by 
family and friends who are not paid for the services they 
provide. In contrast to nursing home care, which by necessity 
is formally provided care, most home and community-based care 
is provided informally by family and friends. Research has 
shown that more than 70 percent of those elderly persons living 
in the community and needing long-term care assistance rely 
exclusively on nonpaid sources of assistance for their care.

                     The Long-Term Care Population

    Limitations in ADLs and IADLs can vary in severity and 
prevalence. Persons can have limitations in any number of ADLs 
or IADLs, or both. An estimated 7.3 million elderly persons 
required assistance with ADLs and IADLs in 1994. This is nearly 
one-quarter of the Nation's elderly. Of this total, an 
estimated 5.7 million elderly persons resided in their own 
homes or other community-based settings and 1.6 million elderly 
were residing in nursing homes. Of the total residing in the 
community, 2.1 million had severe disabilities, needing help 
with at least the ADLs or required substantial supervision due 
to cognitive impairment or other behavioral problem. The 
remaining 3.6 million resided in the community with were lower 
levels of disability.
    The need for long-term care assistance is expected to 
become more pressing in years to come, given the aging of the 
population and especially the growing numbers of the age 85+ 
population who are at the greatest risk of using long-term 
care. Estimates show that the number of elderly needing help 
with ADLs and/or IADLs may grow from 7.3 million to 10 to 14 
million by 2020, and 14 to 24 million by 2060 (U.S. General 
Accounting Office, 1994, p. 8).

                   Paying for Long-Term Care Services

    Table B-11 indicates that sizable public and private funds 
are being spent on long-term care for the elderly--nearly $80 
billion in 1993. Federal and State governments account for the 
bulk of this spending, $46 billion or 58 percent of the total.
    Almost three-quarters of long-term care spending on the 
elderly is for nursing home care. Examination of the sources of 
payment for nursing home care reveals that the elderly face 
significant uncovered liability for this care. Two sources of 
payment--the Medicaid Program and out-of-pocket payments--
account for nearly 90 percent of this total.
    Medicaid is the Federal-State health program for the poor. 
It limits coverage to those people who are poor by welfare 
program standards or those who have become poor as a result of 
incurring large medical expenses. Medicaid Program data show 
that spending for the elderly is driven largely by its coverage 
of people who have become poor as the result of depleting 
assets and income on the cost of nursing home care. In most 
States, this ``spend-down'' requirement means that a nursing 
home resident without a spouse can not have more than $2,000 in 
countable assets before becoming eligible for Medicaid coverage 
of their care. This is not difficult for persons needing 
nursing home care, with average cost in excess of $35,000 per 
year.
    Table B-11 also indicates that nearly all private spending 
for nursing home care is paid directly by consumers out-of-
pocket. At present, private insurance coverage for long-term 
nursing home care is very limited, with private insurance 
payments amounting to 0.2 percent of total spending for nursing 
home care in 1993. (Private long-term care insurance is 
discussed in additional detail below.)

 TABLE B-11.--ELDERLY LONG-TERM CARE EXPENDITURES BY SOURCE OF PAYMENT, 
                                  1993                                  
                        [In billions of dollars]                        
------------------------------------------------------------------------
                     Source of spending                         Amount  
------------------------------------------------------------------------
Nursing home care:                                                      
    Medicaid...............................................        $23.5
    Medicare...............................................          5.5
    Other Federal..........................................          0.7
    Other State and local..................................          0.6
    Out-of-pocket payments and other.......................         28.2
    Private insurance......................................          0.1
                                                            ------------
      Total................................................         58.6
                                                            ============
Home care:                                                              
    Medicaid...............................................          3.8
    Medicare...............................................          9.4
    Other Federal..........................................          1.6
    Other State and local..................................          0.5
    Out-of-pocket payments and other.......................          5.2
    Private insurance......................................          0.1
                                                            ------------
      Total................................................         20.6
                                                            ============
      Total long-term care.................................         79.2
------------------------------------------------------------------------
Source: Office of the Assistant Secretary for Planning and Evaluation,  
  U.S. Department of Health and Human Services.                         

    While most persons needing long-term care live in the 
community and not institutions, comparatively little long-term 
care spending is for the home and community-based services that 
the elderly and their families prefer. In 1993, spending on 
home care for the elderly amounted to $21 billion, or about 
one-quarter of total long-term care spending for the elderly in 
that year. This spending does not take into account the 
substantial support provided to the elderly by family and 
friends. Studies have found that about 65 percent of 
functionally impaired elderly living in the community rely 
exclusively on unpaid sources, generally family and friends, 
for their care. Surveys have found that eight of ten care 
givers provide unpaid assistance averaging 4 hours a day, 7 
days a week. Many care givers are financially disadvantaged and 
one in three is in relatively poor health. Care giving 
frequently competes with the demands of employment and requires 
care givers to reduce work hours, take time off without pay, or 
quit their jobs.
    The table also reveals that Medicare plays a relatively 
small role in financing long-term care services. Medicare, the 
Federal health insurance program for the elderly and disabled, 
is focused primarily on coverage of acute health care costs and 
was never envisioned as providing protection for long-term 
care. Coverage of nursing home care, for instance, is limited 
to short-term stays in certain kinds of nursing homes, referred 
to as skilled nursing facilities, and only for those people who 
demonstrate a need for daily skilled nursing care following a 
hospitalization. Many people who require long-term nursing home 
care do not need daily skilled nursing care, and, therefore, do 
not qualify for Medicare's benefit. As a result of this 
restriction, Medicare paid for 9 percent of the elderly's 
nursing home spending in 1993.
    For similar reasons, Medicare pays for only limited--albeit 
growing--amounts of community-based long-term care services, 
through the program's home health benefit. To qualify for home 
health services, the person must be in need of skilled nursing 
care on an intermittent basis, or physical or speech therapy. 
Most chronically impaired people do not need skilled care to 
remain in their homes, but rather nonmedical supportive care 
and assistance with basic self-care functions and daily 
routines that do not require skilled personnel. When added 
together, Medicare's spending for nursing home and home health 
care for the elderly amounted to approximately 9 percent of 
total program spending in 1993.
    Three other Federal programs--the Social Services Block 
Grant (SSBG), the Older Americans Act, and the Supplemental 
Security Income (SSI) Program--provide support for community-
based long-term care services for impaired elderly people. The 
SSBG provides block grants to States for a variety of services 
for the elderly, as well as the disabled and children. The 
Older Americans Act also funds a broad range of in-home 
services for the elderly. Under the SSI Program, the federally 
administered income assistance program for aged, blind, and 
disabled people, many States provide supplemental payments to 
the basic SSI payment to support selected community-based long-
term care services for certain eligible people, including the 
frail elderly. However, since the funding available for these 
three programs is limited, their ability to address the 
financing problems in long-term care is also limited. In 
addition to these Federal programs, a number of States devote 
significant State funds to home and community-based long-term 
care services.
    As noted above, the Medicaid Program, a means-tested 
Federal-State health program for the poor, is the major source 
of public support for long-term care for the elderly. It funds 
a broad range of long-term care services needed by the elderly, 
including nursing home care, home health care, personal care, 
and various home and community-based services.
    Long-term care spending, and especially nursing home 
spending, account for the great bulk of Medicaid's spending for 
the elderly. As shown in table B-12, below two-thirds of total 
Medicaid spending for the elderly, or $21.2 billion of $31.5 
billion, was for nursing home care in fiscal year 1993. Much 
smaller amounts were spent for various home care services--$2.4 
billion, or 7.5 percent of total spending for the elderly, in 
fiscal year 1993. Together these two categories of long-term 
care spending amounted to three-quarters of total spending for 
the elderly.

TABLE B-12.--FEDERAL AND STATE MEDICAID PAYMENTS FOR THE AGED BY SERVICE
                       CATEGORY, FISCAL YEAR 1993                       
                         [Payments in millions]                         
------------------------------------------------------------------------
                                                             Percent of 
                Service category                  Payments      total   
------------------------------------------------------------------------
Nursing homes..................................    $21,191          67.2
Home care services.............................      2,370           7.5
Prescription drugs.............................      2,441           7.7
Inpatient hospital.............................      2,023           6.4
Inpatient mental health........................      1,006           3.2
Intermediate care facility.....................        590           1.9
Physician services.............................        487           1.5
Outpatient hospital............................        406           1.3
Clinic services................................        214           0.7
Other practitioner.............................         76           0.2
Dental services................................         54           0.2
Lab & x-ray....................................         60           0.2
Rural health clinics...........................          6           0.0
Other services.................................        642           2.0
                                                ------------------------
      Total....................................     31,544         100.0
------------------------------------------------------------------------
Source: Congressional Research Service.                                 

    Medicaid's spending for long-term care for the elderly is 
driven by its coverage of persons who need nursing home care 
and who are not poor by cash welfare standards, but who qualify 
under ``spend-down'' options that States may use for covering 
persons with higher levels of income. One of these is the 
medically needy option. Medically needy persons have incomes 
too high to qualify for cash welfare, but incur medical 
expenses that deplete their assets and incomes to levels that 
make them needy according to State-determined standards. States 
may also use a special income rule, referred to as the ``300 
percent rule,'' for extending Medicaid eligibility to persons 
needing nursing home care. Under this rule, States are allowed 
to cover persons needing nursing home care so long as their 
income does not exceed 300 percent of the basic Supplemental 
Security Income (SSI) cash welfare payment (in 1996, 300 
percent of $470, or $1,410 a month).
    These two groups of nonpoor elderly persons covered by 
Medicaid accounted for 91 percent of the total $21.2 billion 
spent by the program for nursing home care for the elderly in 
fiscal year 1993. Nursing home payments for these two groups 
are so large that they accounted for 61 percent of total 
program payments for all elderly beneficiaries. This spending 
largely explains the fact that elderly Medicaid beneficiaries 
over the years have accounted for a disproportionately large 
portion of Medicaid payments for services. In fiscal year 1993, 
elderly beneficiaries represented 11 percent of total Medicaid 
beneficiaries, and their share of program payments amounted to 
31 percent of total program payments. It should be noted that 
some observers point out that certain nonpoor elderly persons 
may gain Medicaid eligibility, not through depletion of their 
assets in nursing home expenses, but rather through transfer of 
assets to relatives.
    Numerous studies have looked at Medicaid spend-down. A 
review of these studies by Adams, Meiners and Burwell (1992), 
found that the studies generally use two different measures of 
Medicaid asset spend-down. One method measures the percentage 
of persons originally admitted to nursing homes as private 
payers who eventually convert to Medicaid prior to final 
discharge. This method is a measure of the risk to individuals 
of spending down to Medicaid over the course of their 
lifetimes, given the probability they enter a nursing home as 
private payers.
    A second method of measuring Medicaid spend-down examines 
the percentage of Medicaid residents of nursing homes who were 
not eligible for Medicaid when they were originally admitted. 
This method can be useful in capturing the proportion of State 
Medicaid expenditures for nursing home care that is accounted 
for by those who spend down.
    The review of spend-down studies, which use several 
different national and State-level data bases, found widely 
varying estimates of spend-down as measured by these two 
methods. According to the review, the critical factor 
explaining differences among these studies is the length of 
time that persons are studied. The proportion of persons 
spending down during a single stay is much lower than the 
proportion of persons who spend down over their entire 
lifetime, since half or more of persons using nursing home care 
have multiple stays. In general, studies using national data 
tend to show lower estimates of spend-down than do State 
studies that tend to observe people over longer time intervals.
    The review of spend-down studies found that between 20 and 
25 percent of persons who originally enter nursing homes as 
private payers convert to Medicaid before final discharge. For 
this method of measuring spend-down, not enough State studies 
exist to determine the extent to which spend-down rates vary 
from State to State.
    On the other hand, estimates of spend-down as measured by 
the percentage of Medicaid residents of nursing homes who were 
not eligible for Medicaid when they were originally admitted 
vary considerably across States, reflecting variations in 
Medicaid eligibility policies across the States as well as 
other factors. Studies measuring spend-down according to this 
method have found spend-down rates of 27 percent for Michigan, 
31 percent for Wisconsin, and 39 to 45 percent for Connecticut.
    Spend-down studies have also examined the length of time it 
takes for persons to spend down after nursing home admission. 
The results of these studies reveal that of those people who 
spend down, the majority spend down within a year of nursing 
home admission. This finding suggests that most people who 
spend down have limited assets when they first enter a nursing 
home.
    Certain State studies also show that people who spend down 
to Medicaid spend more time on Medicaid after converting to 
Medicaid coverage than they spend as private payers prior to 
conversion. The studies show that Medicaid-paid days account 
for at least 65 to 75 percent of all nursing home days used by 
those who spend down. However, the research also shows that, 
once eligible for Medicaid, people who spend down pay a greater 
proportion of total nursing home costs through contributions of 
their income they are required to make before Medicaid makes 
its payment, than persons who are eligible for Medicaid at 
initial admission. As a result, people who spend down account 
for a somewhat lower percentage of total Medicaid expenditures 
than their percentage of Medicaid-covered nursing home days.

                    Private Long-Term Care Insurance

    Private long-term care insurance is generally considered to 
be the most promising private sector option for providing the 
elderly additional protection for long-term care expenses. 
Long-term care insurance is a relatively new, but rapidly 
growing, market. In 1986, approximately 30 insurers were 
selling long-term care insurance policies of some type and an 
estimated 200,000 persons were covered by these policies. By 
1987, a Department of Health and Human Services Task Force on 
Long-Term Health Care Policies (1987) found 73 companies 
writing long-term care insurance policies covering 423,000 
persons. As of December 1992, the Health Insurance Association 
of America (Coronel & Caplan, 1996) found that more than 3.8 
million policies had been sold, with 121 insurers offering 
coverage. (Note that this is a cumulative total of policies 
sold; fewer persons would be covered, due to failure to pay 
premiums because of death, a change in income, a decision not 
to continue coverage, etc.)
    Although growth has been considerable in a short period of 
time, the private insurance industry has approached this 
potential market with caution. Insurers are concerned about the 
potential for adverse selection in long-term care insurance, 
where only those persons likely to need care actually buy 
insurance. In addition, they point to the problem of induced 
demand for services that can be expected to be generated by the 
availability of new long-term care insurance. With induced 
demand, sometimes also referred to as moral hazard, individuals 
decide to use more services than they otherwise would because 
they have insurance and/or will shift from nonpaid to paid 
providers for their care. In addition, insurers are concerned 
that, given the nature of many chronic conditions, persons who 
need long-term care will need it for the remainder of their 
lives, resulting in an open-ended liability for the insurance 
company.
    As a result of these risks, insurers have designed policies 
that limit their liability for paying claims. Policies have 
been medically underwritten to exclude persons with certain 
conditions or illnesses. In addition, most plans provide 
indemnity benefits that pay only a fixed amount for each day of 
coverage service. If these amounts are not updated for 
inflation, the protection offered by the policy can be 
significantly eroded by the time a person actually needs care. 
Today payment amounts can generally be updated for inflation, 
but only with significant increases in premium costs.
    These design features of long-term care insurance raise 
issues about the quality of coverage offered purchasers of 
policies. The insurance industry has responded to some of these 
concerns by offering new products that provide broadened 
coverage and fewer restrictions. One of the key issues 
outstanding in the debate on the role private insurance can 
play in financing long-term care is the affordability of 
coverage. The Health Insurance Association of America reports 
on the premium costs of policies representing 80 percent of all 
policies sold in the individual and group association markets 
in 1994. For policies paying $100 a day for nursing home care 
and $50 a day for home health care with lifetime 5 percent 
compounded inflation protection and a 20-day deductible period 
average annual premiums in December 1994 are $1,950 when 
purchased at the age of 65 and $6,314 when purchased at the age 
of 79. Many elderly persons cannot afford these premiums.
    The insurance industry believes that affordability of 
premiums can be greatly enhanced if the pool of persons to whom 
policies are sold is expanded. The industry has argued that the 
greatest potential for expanding the pool of persons buying 
coverage and reducing premiums lies with employer-based group 
coverage. Premiums should be lower in employer-based group 
coverage because younger age groups with lower levels of risk 
of needing long-term care would be included, allowing insurance 
companies to build up reserves to cover future payments of 
benefits. In addition, group coverage has lower administrative 
expenses.
    As of December 1994, 968 employers offered a long-term care 
insurance plan to their employees. These employer-based plans 
covered over 440,000 employees, their spouses, retirees, 
parents, and parents-in-law.
    But just how broadly based employer interest is in a new 
long-term care benefit is unclear at the present. Many 
employers currently face large unfunded liabilities for retiree 
pension and health benefits. Also, many employers have recently 
experienced substantial increases in premiums for their current 
health benefits plans. Very few employers contribute to the 
cost of a long-term care plan. Most employers require that the 
employee pay the full premium cost of coverage. In contrast, 
the majority of medium and large sized employers pay the full 
premium cost of regular health care benefits for their 
employees.
    One other suggestion has been offered for enhancing the 
affordability and appeal of long-term care insurance. Various 
States have been exploring an option for encouraging people to 
purchase insurance according to a level of assets they wish to 
protect, rather than according to some standard of 
comprehensive coverage. Under this approach, persons must 
decide, for example, that they wish to protect $50,000 of 
assets. A policy paying out $50,000 for incurred long-term care 
expenses would have a lower premium cost than a policy paying 4 
years of nursing home care at $80 per day. As a result, more 
persons might be able to afford coverage. To encourage 
individuals to consider long-term care insurance as assets 
protection, States would extend to those persons buying 
qualified policies the protection of Medicaid without requiring 
them to deplete assets to levels normally required under law 
(generally, $2,000 for a single individual). These persons 
would be able to retain assets at the level that corresponds to 
their private policies had ceased providing coverage.
    Seven States (California, Connecticut, Illinois, Indiana, 
Iowa, Maryland, and New York) have received approval from the 
Department of Health and Human Services to operate programs 
linking Medicaid and private insurance. Most States have 
implemented programs that protect a dollar of assets for each 
dollar a qualified long-term care policy pays out.
    What impact this approach will have on the marketability of 
private insurance for long-term care is unclear since operating 
experience at the present time is very limited. States, 
however, hope to reduce reliance of middle-income elderly on 
Medicaid for their long-term care needs, and believe they will 
save money by delaying that point when the elderly would have 
to turn to Medicaid for protection. The linkage might also 
discourage persons from sheltering assets because they would 
have insurance, both public and private, to protect assets from 
the catastrophic expenses of nursing home care. The actual 
cost/savings experience of these programs will not be known for 
many years because persons purchasing private insurance in the 
early years of retirement would not generally require services 
until they were 80 or older.

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