Brief Analysis
No. 190

• More than 40 percent of those who turn 65 will spend some time in a nursing home, which can cost an average of $38,000 for a year's stay.

• Of those who enter a nursing home, 55 percent will stay at least a year and 21 percent will remain longer than five years.

The Short-Term Financial Crisis in Medicaid. Medicaid expenditures for long-term care have been increasing by about 15 percent annually since 1990, causing costs to double every five years. From a total Medicaid budget of $132 billion in 1993, nearly $42 billion - almost one-third of the budget - went to long-term care. And without reform, that number will continue to grow. According to the Health Care Financing Administration (HCFA):

• In 1992, Medicaid paid for 47.6 percent of all nursing home care, while Medicare (for the elderly) paid for only 4.6 percent.
• By the year 2025, Medicaid is expected to pay for 67 percent of all nursing home care.

The Long-Term Financial Crisis in Medicaid. Without fundamental reform, things will get worse as the U.S. population ages. For example, the U.S. Census Bureau estimates that:

• The number of Americans age 85 and over will increase from 3.26 million in 1992 to 18.9 million by the year 2050 - a nearly 500 percent increase.

• Between 1990 and 2050, the nursing home population will increase by 2.5 times, but those in nursing homes age 85 and over will triple. [See the figure.]

Good Reform: Block Grants. As part of Medicaid reform, Congress intends to end the Medicaid entitlement program, block grant federal funds to the states and let state legislatures determine how best to spend the money on health care for the poor. As a result, states will have more control over their long-term care dollars and can disqualify the nonpoor.

Good Reform: Enforce Estate Recovery. Although the elderly have more assets than any other segment of the population, nearly half of those who enter a nursing home get Medicaid assistance. One reason is that many people either "spend down" or hide their assets in order to qualify for Medicaid's means-tested benefits.

The Omnibus Budget Reconciliation Act of 1993 (OBRA) requires each state to look back three years when determining eligibility for long-term care services to see if a Medicaid recipient has transferred money or other assets to other persons, such as their children. Furthermore, when a Medicaid recipient dies, the state is expected to recover from the deceased person's estate some of the past cost of providing long-term care.

Many states have been lax in enforcing these OBRA provisions. The result has been that Medicaid-financed nursing home services intended for the elderly poor sometimes go to those with substantial assets. While laws prohibiting "spousal impoverishment" - in which one spouse becomes poor because of the other spouse's nursing home costs - should remain in force, states also should enforce the estate recovery law. One source has estimated that enforcement of the OBRA 1993 provisions could save $25 billion over five years.

Good Reform: Tax Fairness. There is a private market for long-term care insurance, which covers nursing home care and in-home services. For example:

• The number of long-term care policies sold grew at an average annual rate of 29 percent between 1987 and 1992.

• By December 1993, almost 3.5 million people had private long-term care policies.

This remarkable growth occurred despite the fact that long-term care insurance is discriminated against under the tax law. Under current law, every dollar of health insurance premiums paid by an employer escapes federal, state and local income taxes. As a result, government in effect pays up to half the premium - a generous subsidy that encourages employees to overinsure for current medical expenses. The federal government also provides a 30 percent tax deduction for self-employed workers who purchase their own health insurance. But there is no tax incentive for those who purchase long-term care insurance. Buyers must pay taxes first and buy long-term care insurance with what's left over.

If Washington really wants to tackle the Medicaid problem, it can start by giving the same tax break to long-term care insurance as to employer-provided health insurance. It can encourage (not require) employers to either provide long-term care insurance as part of the overall benefits package or make it available to employees who want to buy it with pretax dollars. And it should give individual long-term care insurance purchasers at least the same tax break that self-employed people currently get for buying health insurance.

Most importantly, the federal government should not tax as income disbursements of benefits to long-term care policyholders. Neither health insurance benefits nor life insurance benefits are taxed as income. Long-term care benefits should be no different.

Benefits of Reform. Currently, both the House and Senate have adopted legislation that will permit people to purchase long-term care insurance with pretax dollars, either directly or through a Medical Savings Account, and remove the tax penalty applied to those who file claims. This is an important step in the right direction. Just consider the potential benefits of reform:

• Switching to private-sector long-term care policies will encourage seniors and their families to act more responsibly in providing for the future.
• The use of long-term care insurance to cover in-home health care costs (not covered by Medicaid) will likely reduce nursing home admissions.
• Tax fairness will make long-term care insurance affordable to working people and protect them from most of the costs of nursing home care after they retire.
• Finally, reducing the number of people turning to Medicaid to pay for nursing home care will help to restore the integrity of Medicaid by allowing the government to gain some control over the exploding Medicaid budget.

MORE RELATIVES PROVIDING CARE TO ELDERLY

As Americans continue to live longer, their children or other family members are becoming more involved in caring for them in the home, studies show. Experts say the need for such care will only escalate as baby boomers age over the next 30 years and the over-85 population grows.

• At present, about 6.5 million people -- nearly one-fifth of the population age 65 and older -- require assistance.

• About 22 million families -- nearly 1 in 4 -- are providing some form of assistance to an older relative or friend, according to the National Alliance for Caregiving.

• Of the nearly $91 billion spent on long-term care and nursing homes in 1995, the elderly and their families paid about 40 percent -- whereas out of pocket they paid only 20 percent of the $991 billion spent overall on health.

• Spending by Medicare on some home-care benefits has grown from $3.8 billion in 1990 to $18.3 billion in 1996.

Private long-term care insurance is available. The average annual premium for policies covering four years of nursing home and home care in 1995 was $1,124 if bought at age 50, $2,560 if bought at age 65, and $8,148 a year if bought at age 75, according to the Health Insurance Association of America.

Source: Sara Rimer, "Families Bear a Bigger Share of Caring for the Elderly," New York Times, June 8, 1998.

INSURANCE AVAILABLE FOR LONG TERM CARE

The cost of long-term care is the principal reason for poverty among the elderly, reports the American Health Care Association, a group of nursing home care providers. An AHCA study points out that insurance is available for nursing and home health care, but many people fail to insure against the need.

• Yet two out of five Americans will need nursing home care at some point in their lives, and one in five Americans over age 50 is at risk of needing such care during the next 12 months.

• A full 55 percent of those who enter nursing homes will stay at least one year, and 21 percent will remain five years or longer.

• Nursing home care is cheap compared to the cost of a hospital stay -- an average of $105 a day versus $900 in 1993.

• But the average American man can expect to spend $56,895 on long term care; while the average woman will spend $124,370.

Many people mistakenly assume Medicare or their health insurance plans will pay for long term care. But Medicare pays only for limited nursing home stays after hospitalizations and requires a substantial copayment.

Two out of three nursing home residents, about one million people, now rely on Medicaid to pay for their care. However, in order to qualify for Medicaid, patients must first spend themselves into poverty, and then the benefit per day is limited. Instead, elderly Americans are increasingly purchasing long-term care insurance.

• By the end of 1994, more than 3.8 million people had purchased long-term care policies, and 1,028 employers offered such insurance plans to their employers.

• A 1995 study found that 61 percent of long-term care insurance purchasers have annual incomes of less than $35,000 and about one-third have assets valued at less than $30,000.

• Typically, policies purchased by people age 65 pay an average $86 daily nursing home benefits and $80 daily home care benefit, cover 5.1 years and cost an average of $93 per month.

Source: "Long Term Care Insurance: Debunking the Myths," Background, July 17, 1996, American Health Care Association.

MEDICARE PAYING FOR LONG-TERM HOME CARE

Home health care, primarily home visits by nurses and health aides, is one of the fastest-growing categories of Medicare expenditures. While home visits were intended to ease the transition from hospital care, it is most frequently used as a form of long-term care for chronic conditions, according to a new study.

By examining Medicare claims data for 1993, researchers determined that:

• Roughly three million Medicare enrollees received more than 160 million home health care visits in 1993.

• About 35 percent of the visits occurred more than a month after hospital discharge and 43 percent were not associated with any inpatient care during the previous six months.

• The visits were most frequently for long-term care, with 61 percent of the visits to enrollees who received home health care for six months or more, and 30 percent of the recipients receiving more than 50 visits each.

The researchers found no evidence that home health care was substituted for hospital care. For instance, those urban areas with higher rates of home health care did not have fewer hospital admissions or shorter lengths of stay. However, other evidence suggests that home care may lower hospital costs for severely disabled veterans and elderly patients with congestive heart failure.

Medicare reimbursements for home health care grew from $2 billion in 1988 to $12.7 billion in 1994 and now account for more than 8 percent of Medicare's total budget. This growth was mostly the result of more liberal rules and standardized coverage for home care in 1988 and 1989. Medicare does not cover long-term institutional care, such as in nursing homes, but Medicaid and some private insurers do.

Source: H. Gilbert Welch et al., "The Use of Medicare Home Health Care Services," New England Journal of Medicine, August 1, 1996.

GIVING AWAY MONEY TO GET MEDICAID

In this year's health insurance reform bill, Congress clamped down on the practice some elderly people had engaged in of giving away their savings to relatives so they could qualify for Medicaid. That will become a crime as of January 1st.

• Although some lawyers and advocates for the elderly contend the law is vague and unenforceable, the maximum penalty is a year in jail and a $10,000 fine; attorneys, financial planners and accountants who help in the transfer might also be liable.

• To qualify for Medicaid, a single person can have no more than $2,000 in assets -- excluding homes, household goods, and perhaps cars.

• The spouse of someone in a nursing home can retain about $77,000.

• Transferring assets is permitted to support a spouse or dependent child.

Nevertheless, some are advocating doing away with the law. Others advise seniors to plan ahead by buying long-term care insurance rather than depending on Medicaid. The average price of a basic policy that pays $100 a day for four years is $400 a year for a 50-year-old, $1,100 for a 65-year-old and $4,500 for a 79-year-old.

Source: Anne Willette, "Law Puts Twist Into Medicaid Disability," USA Today, November 25, 1996.