April 2007, Number 7-4 MEDICAID AND LONG-TERM CARE: HOW WILL RISING COSTS AFFECT SERVICES FOR AN AGING POPULATION? By Howard Gleckman* Introduction By mid-century, the nation will be spending more on or illness, long-term care is aimed at assisting those Medicaid, the joint state/federal health program for with long-term chronic illnesses to manage their daily the poor, than it currently spends on national de- lives in relative comfort and security. Such assistance fense.1 Much of this projected growth will be gener- may include help with eating, bathing or toileting, ated by the rapidly expanding demand for long-term cooking, or visits to an adult day care center. care due to an aging population. Therefore, both While medical care is usually delivered in a states and the federal government are exploring ways doctor’s office or hospital, long-term care is often to restrain the program’s growth, but no initiatives to provided at home or in an institutional setting such date have significantly slowed the trend. as a nursing home or assisted living facility. More This brief explores trends in Medicaid spending than 80 percent of those receiving long-term care do on long-term care and the implications of its rapid so at home.3 Most long-term care is provided by an growth for taxpayers and for the needs of an ag- unpaid family member or friend. Care at home may ing population. The first section defines long-term also be supplemented by a professional health aide or care. The second section describes Medicaid’s role in personal assistant. financing it. The third section describes the impact of Long-term care needs are often very different for Medicaid on state budgets. The final section assesses two distinct groups: the elderly and the disabled. The efforts to rein in Medicaid spending. aged who require long-term care are typically widows in their 80s who live alone, have little income, and may be suffering from dementia or other mental What is Long-Term Care? impairment. Nearly 70 percent of those who are 65 today will require some long-term care before they Today, about 10 million Americans need long-term die. They will need care for an average of three years, care.2 In contrast to acute medical care, which is usu- and one in five will require this assistance for five ally intended to help a patient recover from an injury years or more.4 * Howard Gleckman is a visiting fellow at the Center for Retirement Research at Boston College. He is a 2006-2007 Kaiser Family Foundation Media Fellow and a senior correspondent (on leave) in the Washington, DC bureau of Business Week. The author thanks Richard Johnson, Iris Lav, and Molly O’Malley for their helpful comments. 2 Center for Retirement Research The non-elderly disabled may have been born with Figure 2. Medicaid Spending as a Share of GDP, a physical or mental disability, or suffered traumatic 1975-2003 injury in their young adulthood. Thanks to advances in medical technology, these people — who once 2.5 would have died at a young age — now live many years. Their families are often in severe financial 2.0 distress. Unlike many elderly, they have had little opportunity to build up retirement savings or home 1.5 equity, and may have spent much of their savings pay- ing for acute medical care. For example, the lifetime 1.0 cost for a 25-year old who suffers a major spinal cord injury is nearly $3 million.5 0.5 Other forms of long-term care are also very expen- 0.0 sive — with average annual costs of about $34,000 for home care services and more than $75,000 for a 1975 1980 1985 1990 1995 2000 private room in a nursing home.6 These costs far ex- Sources: Author’s calculations from Centers for Medicare ceed the financial resources of most families. Those and Medicaid Services (2006a) and Bureau of Economic who impoverish themselves paying for these services Analysis, 1975-2003. are likely to turn to the government to help finance their long-term care costs. Medicaid and the Costs of Figure 1. Funding Sources for Long-Term Care, Long-Term Care 2005 Total Medicaid costs have grown rapidly in the past three decades, rising from 0.7 percent of GDP in 1975 to 2.1 percent in 2003 (see Figure 2). This growth has been driven both by an increasing number of benefi- ciaries and higher costs per beneficiary. For example, the number of disabled in Medicaid more than tripled between 1975 and 2003 — from 2.5 million to 7.7 mil- lion (see Figure 3a). And the cost for each elderly and disabled beneficiary roughly quadrupled (see Figure 3b). Figure 3a. Medicaid Beneficiaries, in Millions, 1975 and 2003 Source: Komisar and Thompson (2007). 30 24.8 1975 25 2003 The program they most often turn to is Medicaid, which has become the nation’s principal source of 20 payments for professional long-term care services for the elderly and disabled (see Figure 1). In 2005, 15 11.7 Medicaid paid $101 billion for long-term care, nearly 9.6 10 7.7 half of total national spending on these services.7 3.6 4.0 4.5 Individuals paid 18 percent of the costs out-of-pocket. 5 2.5 Medicare, the federal health program for seniors, paid 20 percent.8 Private long-term care insurance 0 covered only 7 percent of costs. Elderly Disabled Children Adults Source: Centers for Medicare and Medicaid Services (2006a). Issue in Brief 3 Figure 3b. Medicaid Costs per Beneficiary, 1975 About one-third of Medicaid spending goes to and 2003 (2003 Dollars) long-term care services for 3.4 million enrollees.10 About 55 percent are elderly, while 34 percent are $16,000 disabled. The remaining 11 percent are adults and 13,818 13,249 1975 children who qualified for coverage on the basis of $14,000 2003 income or a category other than disability.11 $12,000 To be eligible for Medicaid long-term care, individ- $10,000 uals must meet two basic tests: 1) they must be unable $8,000 to care for themselves; and 2) they must have few as- $6,000 sets and little income.12 Many middle-income seniors 3,372 3,570 and disabled initially pay out-of-pocket for long-term $4,000 2,291 1,608 care, because they exceed the asset or income limits. $2,000 637 1,274 Eventually, however, many exhaust their assets and $0 become eligible for Medicaid. For example, as many Elderly Disabled Children Adults as half of nursing home residents who are admitted as private pay patients run out of funds during their Sources: Congressional Budget Office (2006) and author’s stay and become Medicaid beneficiaries.13 calculations from Centers for Medicare and Medicaid Ser- Within these broad eligibility criteria, states are vices (2006a). given considerable flexibility in determining eligi- bility. Both the Clinton and Bush administrations have been extremely liberal in granting waivers Reflecting the high per beneficiary costs for se- from federal Medicaid rules, giving states even more niors and the disabled, almost 70 percent of Medic- leeway in how they run the program. As a result, aid’s benefits go to these two groups (see Figure 4) state spending on long-term care varies widely. In even though they comprise only about 25 percent of 2004, states spent an average of $304 per resident on Medicaid enrollees. Not surprisingly then, Medicaid’s such services. But New York paid $833, while Nevada financial pressures will accelerate rapidly in two de- spent $102.14 cades as the Baby Boomers begin to reach their 80s, the years when many seniors need intensive long- term care. Not only will this large generation produce a substantial increase in the number of elderly, but Medicaid and the States a growing percentage of retirees may not be able to Medicaid is operated as a federal entitlement pro- afford long-term care due to pressures on traditional gram. As a result, its costs automatically rise as the sources of retirement income.9 eligible population increases or medical inflation grows. But unlike Medicare, Medicaid costs are also Figure 4. Medicaid Beneficiaries and Benefits shared by the states. The federal share of Medicaid by Type of Beneficiary, 2006 averages 57 percent, but varies widely. States with 47.6 relatively low personal incomes receive more federal 50 45.9 Percent of money relative to program costs than those with 45 beneficiaries higher personal incomes. In fiscal 2005, for instance, 40 Percent of the federal government paid 70 percent of Alabama’s 35 benefits costs compared to only 50 percent of Connecticut’s.15 30 26.3 State spending on Medicaid needs to be looked 25 22.6 18.7 at closely, because it is often cited in two ways: what 20 16.5 might be thought of as a gross cost and as a net 15 12.7 9.6 expense. In fiscal 2006, states spent 22.2 percent of 10 their total budgets on Medicaid, even more than the 5 21.5 percent they allocated to elementary and second- 0 ary education. However, because Washington reim- Elderly Disabled Children Adults bursed a large portion of that money, states spent 18.1 percent of their general funds on the program.16 Source: Author’s calculations from Congressional Budget Office (2006). 4 Center for Retirement Research Recently, the growth in Medicaid costs has slowed settings, rather than in nursing homes. Thirty-eight sharply. In fiscal year 2006, program costs grew by states plan to expand their home and community- just 2.8 percent, the slowest rate since 1996. It was based care in 2007.22 Proponents argue that allow- the first time since 1998 that Medicaid spending grew ing the aged and disabled to remain at home both more slowly than state tax revenues.17 But this period improves their care and saves money. of relative fiscal comfort will be brief. The Centers Although many recipients prefer to remain home, for Medicare and Medicaid Services project no further it is unclear whether home-based care will reduce slowing in the growth of overall health spending over overall costs or improve quality. An extensive survey the next decade.18 of prior research concluded that “expanding home and community-based services does not reduce aggre- gate long-term care expenditures, although average Can Medicaid Cost Growth per consumer costs are less than nursing home care in many studies.” The reason is that many individu- Be Contained? als who currently receive care at home receive unpaid assistance from family members. If Medicaid began Policymakers have been exploring how to curb the spending more on home care services, demand for growth of Medicaid spending on long-term care. Op- these paid services might increase, offsetting any tions include encouraging consumers to buy private cost savings gained by shifting away from nursing long-term care insurance; attempting to move care homes.23 In terms of quality of care, quality mea- out of nursing homes and into home and community- sures for these patients appear much too crude to based settings; and shifting beneficiaries into private determine whether they are getting “better” care. managed care plans. Congress and the states are also making Medicaid eligibility more restrictive. Finally, some experts suggest that technology can help. Evi- Managed Care dence to date, however, suggests that none of these changes has yet had a meaningful impact on current States are also seeking cost control through managed spending, and these fixes are unlikely to significantly care.24 In these programs, private firms are paid an reduce future cost pressures. annual per patient capitation fee to manage both the medical and long-term care needs of Medicaid-eligible seniors. The hope is that these vendors will better Long-Term Care Insurance identify and control disease, as well as co-ordinate the care of those suffering from multiple illnesses. To One way to reduce the taxpayer burden of long-term date, only about 2 percent of Medicaid beneficiaries care is to shift costs to individuals by encouraging are in managed care plans.25 While one study sug- them to purchase private long-term care insurance. gests that such programs may save money,26 overall, In 2006, Congress expanded the Partnership Act, little evidence suggests significant cost savings. which allows seniors who purchase long-term care in- surance to increase the amount of the assets they may protect while still becoming eligible for Medicaid. Asset Protection For example, if an individual purchases a $300,000 long-term care policy, he could retain assets up to Policymakers have been concerned that many seniors $300,000. Under the new provisions, 22 states plan use sophisticated financial techniques to artificially to begin such programs in 2007.19 However, in the transfer assets in an effort to meet the program’s four states that have operated a Partnership program impoverishment requirements. In response, a new for many years, results have been disappointing.20 In 2005 law requires states to review asset transfers that part, the low demand for long-term care policies is a occur within five years of the time a person becomes result of their cost. A high-end policy for a 62-year- eligible for Medicaid. However, little evidence old couple can cost between $7,600 and $11,500 per indicates that such problems are widespread, or that year.21 states could generate major cost savings by prohibit- ing them. Most asset transfers among nursing home Home and Community-Based Care patients are made by those who never qualify for Medicaid. Of those who do become Medicaid eligible States are making a major effort to keep more Medic- after a period of paying for nursing home care on aid recipients at home or in small community-based their own, just 5 percent had cash transfers of more Issue in Brief 5 than $50,000.27 Experts estimate that even with the toughest crackdown, states are not likely to recover more than 1 percent of total Medicaid spending for long-term care.28 Technology and Cost Savings Some policy experts believe that two technologies may help control costs. The first is assistive technolo- gies that would make it possible for people to care for themselves, such as automated pill dispensers that would help people properly take medications on their own. The second is new drugs themselves, for dis- eases such as Alzheimer’s, that could limit the need for long-term care. Conclusion The goal of government long-term care policy should be to provide the best possible quality of life for the elderly and disabled in the most cost-effective way. It should not merely become an exercise in saving money. However, unless policymakers are willing to make major changes, Medicaid will threaten to crowd out spending for other services citizens have come to expect from government, force substantial tax increases, or both. This brief described the existing Medicaid system, its cost pressures, and experiments aimed at reducing cost growth. Subsequent briefs will look at the role of private long-term care insurance, describe how other developed nations provide such care, and explore ideas for fundamental change in the way long-term care is financed and delivered in the United States. The fundamental question that reformers must an- swer is whether this care should be provided as part of the nation’s structure of social insurance, whether it should be an individual responsibility, or some combination of the two. 6 Center for Retirement Research Endnotes 1 By 2045, projected Medicaid spending is 6.5 per- with incomes in excess of these levels must contrib- cent of GDP — 3.7 percent by the federal government ute the difference to the cost of their care. and 2.8 percent by the states (Kronick and Rousseau, 2007). In 2006, spending on national defense was 13 Weiner, Sullivan, and Skaggs (1996). 4.0 percent of GDP (Congressional Budget Office, 2007). 14 O’Brien (2005). 2 Komisar and Thompson (2007). 15 Henry J. Kaiser Family Foundation (2007). 3 Georgetown University (2003). 16 Henry J. Kaiser Family Foundation (2007). 4 Kemper, Komisar, and Alecxih (2005). 17 Urban Institute and Kaiser Commission on Med- icaid and the Uninsured (2006). 5 National Spinal Cord Injury Statistical Center (2006). 18 Centers for Medicare and Medicaid Services (2006b). 6 Metlife (2006). 19 Urban Institute and Kaiser Commission on Med- 7 Komisar and Thompson (2007). icaid and the Uninsured (2006). 8 Despite a common misconception, Medicare is not 20 These states — California, Connecticut, Indiana designed to provide long-term care. It does pay for and New York — began their programs between 1992 nursing home and home health assistance, but usu- and 1994. However, only 211,972 long-term care ally only for rehabilitation services or other post-acute Partnership policies have been purchased since that treatment. The program normally pays for such care time, and 172,477 remain active. Just 2,761 people, or only after a patient has been released from a hospital 1.3 percent of policyholders, have ever received ben- and, even then, for just a limited amount of time. efits (U.S. Government Accountability Office, 2005). 9 Munnell, Golub-Sass, and Webb (2007). 21 A high-end policy might insure $200 per day for life, with a 5 percent inflation adjustment and a 90- 10 The budget figure is from Centers for Medicare day waiting period (the high-end policy estimate is and Medicaid Services (2006b) and the number of from The Baker/Brown Company). Even a more mod- beneficiaries is from Sommers, Cohen, and O’Malley est policy — insuring $150 per day for 4 years, with a (2006). 90-day waiting period — carries stiff premiums, with a 65-year old likely to pay $2,346 annually (Johnson 11 Sommers, Cohen, and O’Malley (2006). and Uccello, 2005). 12 Under the asset test, a couple living together may 22 Urban Institute and Kaiser Commission on Med- keep only $3,000 in liquid assets in most states. If icaid and the Uninsured (2006). one spouse is in a nursing home, the other is al- lowed half of the couple’s assets, up to $101,640 (U.S. 23 Weiner and Brown (2004). Department of Health & Human Services, 2007). Couples are also allowed to retain their home up to a 24 This effort parallels the shift to Medicaid managed home equity limit of $500,000 or — at the discretion care for younger, non-disabled Medicaid recipients. of individual states — up to $750,000. Under the income test, generally, a person receiving home care 25 Saucier, Burwell, and Gerst (2005). may earn no more than $623 per month, the level at which an individual becomes eligible for Supplemen- 26 Kane, et al. (2003). tal Security Income (SSI). For persons in a home and community-based waiver program, the limit is gener- 27 Waidmann and Liu (2006). ally equal to 300 percent of the SSI standard. Those 28 Waidmann and Liu (2006). Issue in Brief 7 References Bureau of Economic Analysis. National Income and Komisar, Harriet L. and Lee Shirey Thompson. 2007. Product Accounts, 1975-2003. Washington, DC: “National Spending for Long-Term Care.” Fact U.S. Department of Commerce. Sheet (February). Washington, DC: Georgetown University Long-Term Care Financing Project. Centers for Medicare and Medicaid Services. 2006a. “Medicare and Medicaid Statistical Supplement.” Kronick, Richard and David Rousseau. 2007. “Is Health Care Financing Review. Washington, DC: Medicaid Sustainable? Spending Projections for U.S. Department of Health and Human Services. the Program’s Second Forty Years.” Health Affairs Available at: http://www.cms.hhs.gov/Medicare- 26(2): 271-287. MedicaidStatSupp/LT/list.asp#TopOfPage. Metlife. 2006. “The Metlife Market Survey of Nurs- Centers for Medicare and Medicaid Services. 2006b. ing Home and Home Health Costs.” Westport, CT: “The Future of Long-Term Care and Medicaid.” Metlife Mature Market Institute. Testimony of Dennis Smith before the House Committee on Small Business. Washington, DC: Munnell, Alicia H., Francesca Golub-Sass, and U.S. Department of Health and Human Services. Anthony Webb. 2007. “What Moves the National Retirement Risk Index? A Look Back and an Congressional Budget Office. 2006. “Medicaid Update.” Issue in Brief 2007-1. Chestnut Hill, MA: Spending Growth and Options for Controlling Center for Retirement Research at Boston College. Costs.” Testimony of Donald B. Marron before the Special Committee on Aging, U.S. Senate. National Spinal Cord Injury Statistical Center. 2006. Washington, DC. “Spinal Cord Injury: Facts and Figures at a Glance.” Birmingham, AL: University of Alabama. Congressional Budget Office. 2007. The Budget and Economic Outlook: Fiscal Years 2008 to 2017. O’Brien, Ellen. 2005. “Long-Term Care: Understand- Washington, DC. ing Medicaid’s Role for the Elderly and the Dis- abled.” Washington, DC: Kaiser Commission on Georgetown University Long-Term Care Financing Medicaid and the Uninsured. Project. 2003. “Who Needs Long-Term Care?” Fact Sheet. Washington, DC. Saucier, Paul, Brian Burwell, and Kerstin Gerst. 2005. “The Past, Present and Future of Managed Long- Henry J. Kaiser Family Foundation. 2007. “State- Term Care.” Washington, DC: Office of the As- healthfacts.org.” Available at: http://www.state- sistant Secretary for Planning and Evaluation, U.S. healthfacts.org/cgi-bin/healthfacts.cgi. Department of Health and Human Services. Johnson, Richard and Cori Uccello. 2005. “Is Private Sommers, Anna, Mindy Cohen, and Molly O’Malley. Long-Term Care Insurance the Answer?” Issue in 2006. “Medicaid’s Long-Term Care Beneficiaries: Brief 29. Chestnut Hill, MA: Center for Retire- An Analysis of Spending Patterns.” Washington, ment Research at Boston College. DC: Kaiser Commission on Medicaid and the Uninsured. Kane, Robert, Gail Keckhafer, Shannon Flood, Boris Bershadsky, and Mir Said Siadaty. 2003. “The Ef- U.S. Department of Health and Human Services. fect of Evercare on Hospital Use.” New York, NY: 2007. National Clearinghouse for Long-Term Care The American Geriatrics Society. Information. Washington, DC. Available at: http:// www.longtermcare.gov/LTC/Main_Site/index.aspx. Kemper, Peter, Harriet L. Komisar, and Lisa Alecxih. 2005. “Long-Term Care over an Uncertain Fu- U.S. Government Accountability Office. 2005 “Over- ture.” Inquiry. 42(4): 335-350. view of the Long-Term Care Partnership Pro- gram.” Letter to the Committee on Finance, U.S. Senate. GAO-05-1021R. Washington, DC. 8 Center for Retirement Research Urban Institute and Kaiser Commission on Medic- aid and the Uninsured. 2006. Estimates based on data from Medicaid Statistical Information System (MSIS) reports from the Centers for Medicare and Medicaid Services (CMS). Waidmann, Timothy and Korbin Liu. 2006. “Asset Transfer and Nursing Home Use.” Kaiser Com- mission on Medicaid and the Uninsured. Weiner, Joshua and David Brown. 2004. “Home and Community Based Services: A Synthesis of the Literature.” Washington, DC: Administration on Aging. Weiner, Joshua, Catherine M. Sullivan, and Jason Skaggs. 1996. “Spending Down to Medicaid: New Data on the Role of Medicaid in Paying for Nurs- ing Home Care.” Washington, DC: AARP Public Policy Institute. About the Center Affiliated Institutions The Center for Retirement Research at Boston Col- American Enterprise Institute lege was established in 1998 through a grant from the The Brookings Institution Social Security Administration. The Center’s mission Center for Strategic and International Studies is to produce first-class research and forge a strong Massachusetts Institute of Technology link between the academic community and decision Syracuse University makers in the public and private sectors around an Urban Institute issue of critical importance to the nation’s future. To achieve this mission, the Center sponsors a wide variety of research projects, transmits new findings to Contact Information Center for Retirement Research a broad audience, trains new scholars, and broadens Boston College access to valuable data sources. Since its inception, Hovey House the Center has established a reputation as an authori- 140 Commonwealth Avenue tative source of information on all major aspects of Chestnut Hill, MA 02467-3808 the retirement income debate. Phone: (617) 552-1762 Fax: (617) 552-0191 E-mail: crr@bc.edu Website: http://www.bc.edu/crr The Center for Retirement Research thanks AARP, AIM Investments, CitiStreet, Fidelity Investments, John Hancock, Nationwide Mutual Insurance Company, Prudential Financial, Standard & Poor’s, State Street, and TIAA-CREF Institute for support of this project. © 2007, by Trustees of Boston College, Center for Retire- The research reported herein was supported by the Center’s ment Research. All rights reserved. Short sections of text, Partnership Program. The findings and conclusions ex- not to exceed two paragraphs, may be quoted without pressed are solely those of the author and do not represent explicit permission provided that the author is identified and the views or policy of the partners or the Center for Retire- full credit, including copyright notice, is given to Trustees of ment Research at Boston College. Boston College, Center for Retirement Research.