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Financing Long-Term Services and Supports in an Aging Society

ROBERT A. APPLEBAUM

EMILY J. ROBBINS

INTRODUCTION

Providing long-term services and supports to individuals who experience disability has become a big part of the U.S. economy. With large and growing expenditures in long-term care (LTC), it is important to understand what services are provided and the costs of these services. One important factor in discussing long-term financing is the recognition that, despite very high expenditures on LTC, many consumers know very little about how such care is funded. For instance, in a recent survey by the MetLife Mature Market Institute (2009), more than two thirds of respondents reported that they had LTC insurance coverage. One in five indicated that disability insurance would cover the cost of their LTC. One third of the respondents felt that Medicare (the national health insurance program for individuals age 65 or older, individuals under age 65 with certain disabilities, and individuals of any age with end-stage renal disease) and Medicaid (the joint federal–state program designed to provide health care for individuals with limited income and resources) would cover the total cost of care, and 14% indicated that their current health insurance policy would finance future LTC needs. As will be discussed in this chapter, this is not the case, and in fact, more than nine of every 10 consumers do not have coverage for ongoing long-term services and supports.

COST OF LONG-TERM CARE SERVICES

Long-term services and supports are provided in a range of settings broadly categorized as in-home services, residential services, and institutional care. Recent definitions have classified in-home services, community services, and those residential services that maximize consumer independence, such as assisted living, into a category termed home- and community-based services (HCBS). The in-home services of this grouping includes a variety of personal and support services, such as assistance with bathing, dressing, and using the toilet. Community-based services include assistance designed to help an individual and his or her family continue to reside in the community, through such mechanisms as attending an adult day care program (National Clearinghouse for Long-Term Care Information, 2010). Defining residential services is a bit more complicated. Some residential settings, such as assisted living, are designed to maximize consumer autonomy; in fact, these service settings can receive funding from home- and community-based programs, and thus are treated as community-based care rather than institutional care. Other residential settings, such as board-and-care or domiciliary homes, where individuals do not have private rooms and other environmental choices, such as locking doors, food preparation areas, and a private bathroom, are categorized as institutional settings. Nursing homes and intermediate care settings specifically designed for individuals with intellectual or developmental disabilities are also classified as institutional settings.

The cost of LTC is determined by at least three factors: the amount and type of assistance needed, the setting where services and supports are provided, and geographical location. Some individuals with disabilities receive long-term services and supports from friends and family only and incur no formal provider costs. On the other hand, individuals requiring 24-hour skilled nursing home care can expect to pay on average between $75,000 and $84,000 annually (Genworth Financial, 2013). Those residing in the community receiving an array of formal in-home services, such as personal care, transportation services, meal programs, or adult day care, typically pay anywhere from $250 to $2,500 a month for these services.

Costs vary by the type and amount of services needed. For example, on average, personal care provided by a home health aide is about $19 per hour, and adult day services are approximately $65 per day (Genworth Financial, 2013). Assisted living facility costs are approximately $3,450 per month, and again vary by region, type of facility, and the consumer’s needs (Genworth Financial, 2013). The range of LTC costs cannot be understated. Some individuals with private resources choose to remain at home despite substantial need and can incur annual costs of more than $100,000. On the other hand, many individuals, with the help of family members, may be able to remain in the community with in-home service packages of only a few hundred dollars per month. Nursing home care also varies dramatically by state, with the median annual cost of a nursing home in Alaska reported at $222,000, compared to $46,000 in Texas (Hauser, Fox-Grage, & Ujvari, 2012; for a complete overview of how costs vary across the United States, see Genworth Financial [2013]). Thus, the level of disability, the availability of family support, and the geographic area are all important factors in determining the overall cost of the home-care package.

PAYING FOR LONG-TERM CARE

There are both informal and formal mechanisms for delivering and paying for long-term services and supports. Despite a large increase in formal LTC, the majority of LTC delivered in the United States is unpaid care provided by family and friends, with an estimated value of these services being more than $450 billion (Hauser et al., 2012; see Chapters 3 and 4, this volume). The substantial growth in the population in need of long-term assistance, particularly the increase in older people over age 80, has resulted in a rapidly expanding formal LTC industry, which was estimated to be valued at more than $225 billion in 2009 (Eiken, Burwell, Gold, & Sredl, 2012; Georgetown, 2007; MedPAC, 2010).

LTC is financed through a range of public and private mechanisms. In the public sector, Medicaid (almost 50% of total LTC costs) and Medicare (20% of total costs) are the two largest payors. The Veterans Administration (VA) is also an important public funder of long-term services and support for military veterans, providing more than $3.5 billion for both in-home and institutional services (Tritz, 2006; U.S. Department of Veterans Affairs, 2009). These Veteran Administration expenditures, along with other state and federal public programs, account for about 2.5% of total LTC expenditures. In the private sector, individual out-of-pocket payments and private LTC insurance account for approximately 18% and 7% of all LTC financing, respectively (Georgetown, 2007). Other private expenditures, such as United Way, and other philanthropic foundations represent the final 2.5% of LTC funding. A description of the major funders of LTC is provided in the following sections.

MEDICAID

Enacted in 1965, Medicaid is a joint federal–state program designed to pay health costs of individuals with limited income and resources. Medicaid is one of the largest domestic programs in the U.S. federal budget, spending more than $413 billion in 2011. Interestingly, although Medicaid spent more than $114 billion on LTC in 2012 (Kaiser Family Foundation, 2013a), accounting for 28% of total Medicaid expenditures, the LTC benefit was not even included in the initial Medicaid legislation (Truffer, Klemm, Wolfe, Rennie, & Shuff, 2012). The intermediate care benefit for nursing home care was added in 1968, and the home and community-based services waiver program, known as HCBS Waivers, which—for those meeting Medicaid requirements—provides services that allow individuals to remain in their own home or live in a community setting, was enacted in 1981. Medicaid is financed by both the federal government and individual states through a formula based on the per capita income of the state, such that a high-income state, such as New York, would pay a full 50% of the program whereas a low-income state, for example, Mississippi, could have a state share as low as 17%. The program is administered by each state, but the federal government requires states to provide certain health and LTC services, including hospital and nursing home coverage, whereas other services are state options, such as dental and vision care.

In 2011, Medicaid spent 52.5% of its LTC budget on institutional care, either nursing homes or intermediate care facilities for individuals with intellectual or developmental disabilities. About 30% of Medicaid LTC funds were allocated to home- and community-based waiver programs, with another 11% of LTC funds used for the personal care option (Eiken et al., 2012). Four percent of the Medicaid LTC budget was allocated to home health care.

Medicaid is a social welfare program and as such has strict eligibility requirements. To be eligible to receive Medicaid LTC services, an individual must meet both low-income and disability thresholds. Although income and asset eligibility criteria vary by state, in general an individual must have income below the poverty level and assets between $1,500 and $5,000. In recognition of the need to have higher income in order to pay for day-to-day living expenses, states have the option of allowing those individuals residing in the community who are in need of LTC to have a higher income threshold (up to 300% of the monthly Supplemental Security Income amount, which was $674 per month in 2010). Asset limitations cannot be modified. Individuals requiring Medicaid assistance and residing in a nursing home essentially pay their entire incomes to the Medicaid program and receive a monthly allowance, typically $40 to $50 per month, for personal expenses.

In addition to meeting income guidelines, to be eligible for Medicaid support for nursing home care or HCBS under the Medicaid waiver, individuals must have a severe functional limitation. For instance, can an individual dress or bathe him- or herself independently? Again, the criteria vary by state, but in general, an individual must have impairments in at least two activities of daily living, such as bathing, dressing, transferring from bed to chair, getting to the toilet, or eating independently. Severe cognitive impairment can also qualify as a disability. The personal care option and home health coverage also have requirements to receive services, but they are not as restrictive as nursing home or waiver eligibility standards. Because of the high cost of nursing home care and the lack of private insurance, Medicaid has become the major payor of nursing home care, with about six in 10 nursing home residents paid for from this source.

Although institutional care is still the largest LTC Medicaid category, there has been a significant shift in Medicaid financing in recent years. In 1997, 76% of all Medicaid LTC expenditures were allocated to institutions, whereas in 2009 the proportion was 55% (Eiken et al., 2012). Again, state variation is dramatic (see Figure 16.1), with Oregon spending 25% of its 2011 Medicaid budget on institutional LTC, compared to Alabama’s institutional expenditures of 62% of its 2011 Medicaid budget (Kaiser Family Foundation, 2013b).

Nursing homes receive a per diem payment per resident; the daily rate is specific to each facility. The rate is set by each state and is typically determined by a range of factors, such as condition of the resident, to assess the likely amount of assistance that person would need (termed case mix), facility staffing levels, capital costs, geographical area, type of services covered, and funds available to the state. In some states, such as Ohio, a quality-of-care component is also included in the payment. The average daily Medicaid payment rate in 2011 was $178, ranging from $233 per day in Hawaii to $120 per day in Illinois (Hauser et al., 2012).

Medicaid has become a major part of state budgets, accounting nationally for more than one fifth of entire state expenditures. With LTC expenditures making up about one third of total Medicaid spending, in combination with a growing older population with disability, states recognize the intense challenges faced by Medicaid as our nation ages. Exacerbating this challenge are recent trends that show a growth in the number of individuals under age 60 who are experiencing a long-term disability and are using formal long-term services and supports (Mehdizadeh, Applebaum, Nelson, Straker, & Deacon, 2013).

FIGURE 16.1 The proportions of Medicaid funds allocated to individual services.

Source: Kaiser Family Foundation (2013a).

MEDICARE

Also enacted in 1965 under Title 18 of the Social Security Act, Medicare is a federal program designed to provide insurance coverage for older adults with a demonstrated work history qualifying them for Social Security. With $502 billion in expenditures, the insurance program is funded through a variety of sources, including a payroll tax on employees and employers (1.45%), beneficiary premiums and cost sharing, and general tax revenues. The program was primarily developed to provide coverage for acute medical care—it was not designed to pay for LTC. The program includes four coverage areas: Hospital Insurance (Part A), Supplementary Medical Insurance (Part B), Medicare Option (Part C), and Prescription Drug Coverage (Part D). Although Medicare is not designed to cover LTC, several components of the program do include traditional LTC elements.

The Medicare Skilled Nursing Home Benefit is the largest component of Medicare allocated to LTC, with expenditures of $27.4 billion in 2010 accounting for about 11% of total LTC expenditures (Talaga, 2013). As a result of changes in hospital reimbursement, through the implementation of a prospective payment system (method of reimbursement in which Medicare payments are made based on a predetermined, fixed amount), the average length of stay for Medicare hospital recipients has dropped by about 5 days. This change has resulted in a dramatic expansion of nursing home expenditures under Medicare, increasing from $10.4 billion in 1999.

Despite directing these funds to nursing home care, the Medicare benefit is designed as acute care rehabilitation coverage. In fact, an individual is not eligible for the Medicare nursing home benefit unless he or she has spent 3 days in the hospital with an acute care ailment and the nursing home stay is directly related to that hospitalization. For consumers meeting these criteria, Medicare will cover the first 20 days in the nursing home at no charge to the beneficiary. Between day 21 and day 100, Medicare requires a cost share of $157.50 (2015 amount), and after day 100, Medicare coverage ceases. Because individuals covered by Medicare are receiving rehabilitation services, the average Medicare reimbursement rate is considerably higher than either private pay or Medicaid rates of reimbursement. For example, a recent study in Ohio found that the average Medicaid reimbursement rate in 2007 was $174 per day, whereas the Medicare daily rate was $351 (Mehdizadeh, Applebaum, Deacon, & Straker, 2009).

Reimbursement changes have resulted in a shift in how nursing homes are being used. Many individuals enter nursing homes for rehabilitative care under Medicare. For example, a study by Mehdizadeh et al. (2009) found that after 3 months, only 43% of all those entering Ohio nursing homes were still residents, and after 6 months, fewer than one third remained as residents. A large portion of these short-term residents enter the nursing home via the hospital and receive Medicare short-term care prior to returning to the community (Mehdizadeh, Nelson, & Applebaum, 2006). The shift to reimburse hospitals prospectively has increased short-term nursing home use, and as will be noted in the next section, has had a similar effect on home health utilization.

The Medicare Home Health Benefit provided $18.4 billion in coverage in 2011, up from $8 billion in 2001 (Talaga, 2013). In 2009, there were more than 10,400 Medicare-certified home health agencies, growing from just over 7,000 in 2001 (MedPAC, 2010). Medicare home health benefits fall under both Part A and B of the Medicare coverage plan. Services include nursing, home health aides, and a range of therapies, such as physical and speech therapy. To receive home health care, a physician must order the specified services, and limits are placed on the type, frequency, and duration of home health services depending on the condition and circumstances of the beneficiary. Medicare home health is designed primarily as complementary to the acute care condition experienced by the consumer. In some instances an individual can receive Medicare home health benefits for an extended period of time lasting 6 months or longer. There is no cost share requirement for the home health benefit.

As is the case for the nursing home benefit, home health expenditures have dramatically expanded as a result of the prospective payment system, and this has further blurred the lines between acute care and LTC services. In many instances, older people with chronic disability may receive services from both HCBS providers for assistance, such as personal care, and certified home health agencies for nursing, therapies, and in some instances, overlapping home health aide care. Although many questions arise about the home health services delivery system, it appears evident that there will be continued pressures to reduce hospital stays and even to expand outpatient medical procedures, suggesting that there will be expanded use of Medicare home health in the future.

The Medicare Hospice Benefit spent more than $15 billion in 2012, up from $2 billion in 1999. Currently, there are 3,400 Medicare hospice providers in the United States. The hospice benefit is targeted to individuals in the last 6 months of life, although about 20% of hospice users require services for more than 180 days. Hospice care does not require a deductible under Medicare. Although the majority of hospice care is short in duration, there is a growing trend for such services to be provided over an extended period of time, once again blurring the lines between short- and long-term services and supports.

OTHER PUBLIC FUNDING MECHANISMS

In addition to the two major public funding sources for LTC, Medicaid and Medicare, there are several smaller public contributors (accounting for less than 5% of the total LTC bill).

The Veterans Administration

The Veterans Administration (VA) provides an array of LTC services to veterans, from homemaker/home health aide services to fully skilled nursing home care. LTC services for veterans whose disability is determined to be a result of their military service are provided at no cost to them. Veterans whose disability is determined to be nonservice related must make copayments for LTC services. There are three levels of copays for veterans. Inpatient care, which includes nursing home care, respite care, and geriatric evaluations, has a copayment ranging from $0 to $97 per day depending on the veterans’ individual financial status. Outpatient care services, which include adult day care, respite care, and geriatric evaluations, range in cost from $0 to $15 per day. Finally, domiciliary care, designed for veterans who require care falling between acute care and fully skilled nursing home care, consists of respite services, geriatric evaluation and management by an interdisciplinary team of professionals, community residential care, home health care, adult day care, and homemaker/home health aide services, and ranges in cost from $0 to $5 per diem. For all types of care, days 0 to 21 are free of financial obligations and are fully covered by the VA. Days 22 to 180 require copay based on the veteran’s income. Financial responsibility for care required over 181 days is determined by the individual’s income and assets, less $89,280 in liquid assets for spousal resource protection (U.S. Department of Veterans Affairs, 2009). LTC through the VA can be provided in a number of locations: a VA nursing home, a community nursing home, a State Veterans Home, or domiciliary. Care provided outside of the VA network is not covered by VA funds. The VA also provides a monetary benefit termed “Aid and Attendance and Housebound Benefit” as a supplement to those receiving a VA monthly pension. The benefit is available to those who require assistance from another person to perform personal functions, such as bathing or dressing, or to those who are housebound.

The Older Americans Act

The Older Americans Act (OAA), passed in 1965, allocates a substantial portion of its $1.7 billion allocation to HCBS. Major HCBS funded by the OAA include Aging and Disability Resource Centers that provide information and referral assistance and long-term options, including counseling; home-delivered meals; care coordination and case management; homemaker, personal care and transportation services; and a series of services in support of caregivers. Although about two thirds of OAA funds are allocated to HCBS, the entire legislative allocation of $1.7 billion, when factoring in inflation, has remained flat funded for the past three decades, with the 1980 allocation at $1.1 billion (Administration for Community Living, 2010). Yet, over this time period, the older population has doubled in size. Nevertheless, the OAA provides infrastructure support for the aging network, and although underfunded, it remains a core foundation for the service delivery system for older people.

Programs of All Inclusive Care for the Elderly

The Programs of All-Inclusive Care for the Elderly (PACE) is designed to assist individuals age 55 and over to stay at home in the community and live as independently as possible. This program uses a combination of Medicare and Medicaid funds to cover all medically necessary care and services, both acute and long term (Centers for Medicare and Medicaid, 2008). To be eligible to receive assistance from PACE, an individual must be at least 55 years old, live in a PACE organization service area, meet the state certification for nursing home level of care, and be able to live safely in the community with the services provided by PACE. Services provided under PACE include, but are not limited to, primary care; acute care needs, including emergency services; prescription drugs; nursing home; home health care; physical and occupational therapy; adult day care; meals; dentistry; social services; transportation; and any additional services deemed necessary by the PACE health care team. Individuals can also receive Medicare, Medicaid, both, or neither, and still remain eligible for PACE funding. If an individual is not covered by Medicaid, he or she is charged a monthly premium for LTC services and Medicare Part D (the prescription drug benefit) equal to the Medicaid capitation amount; that is, the predetermined amount that Medicaid has agreed to pay providers for each individual under its care. The goal of the PACE program is to assist individuals to remain in the community for as long as possible. Consequently, only approximately 7% of PACE participants reside in a nursing home (National PACE Association, 2010).

State-Funded Home- and Community-Based Care Services Programs

State-funded home- and community-based care services programs are designed to provide support services to older adults to help maintain independent community living. As each state is generally responsibly for the funding and eligibility of its HCBS program, there is considerable variability among the programs. Programs are financed in a variety of ways. The majority of programs are funded through general state revenues (taxes). Other programs (such as the HCBS program in Pennsylvania) use alternative methods, such as state lottery revenues, to fund programs. For these programs, basic eligibility requirements are that individuals be age 60 or over, in need of respite services, have limited finances, and have impairments in some activities of daily living (ADLs) and some instrumental activities of daily living (IADLs). Individual financial contributions for services also vary by state. In Massachusetts, for instance, individuals with incomes above $1,806 per month are required to pay the total cost of care, but those with limited income or intermediate health care needs must pay a 15% copay for services rendered. State-funded home- and community-based care programs generally conduct a needs assessment of the individual applying for the program and develop an individualized service plan for care. Services provided by state-funded HCBS programs include homemaker, personal care, day care, home-delivered meals, transportation, and other community support services as required by the care plan. The top five states in order of HCBS program financing in millions of dollars are Pennsylvania ($182.2), Massachusetts ($171.5), Illinois ($155.2), New York ($95.3), and Florida ($67.2; Houser, Fox-Grage, & Gibson, 2009). Some states, such as Alabama, Mississippi, Montana, New Hampshire, and Ohio, have limited or no HCBS programs and are ranked at the bottom of the state-funded HCBS programs list (Houser et al., 2009).

Levy Programs

Local levy programs are an alternative funding mechanism used in some states (see Case Study 16.1). In part because of the limited funds available from the OAA for in-home services, and in part because some states have no or limited state home care programs, local tax levies have been used as an approach in select states. In our review of this approach, we found 12 states that have used this approach, with one state, Ohio, generating $165 million in 2011 (Payne, Applebaum, & Straker, 2012). In Ohio, local funding brings in more than double the amount the state receives from its OAA allocation. Typically, these programs require voters to return to the ballot box every 3 to 5 years to reauthorize senior levy programs. States use the funds collected via levies to fund an array of services, such as nutrition, home-delivered meals, transportation, in-home services, information and referral, case management, senior center administration, home modification, adult day care, prescription assistance, volunteer coordination, and provide low-income seniors with dental, hearing, and vision services. The challenge with levy programs is twofold. First, local municipalities must work to educate voters and political officials on the need and benefit of the levy. Second, because levies are property-tax based, lower income residents who own their dwellings may be negatively affected.

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