APPENDIX B. HEALTH STATUS 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, 1967-95
Out-of-Pocket Spending by Medicare Beneficiaries
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 1995, total
spending on long-term care for the elderly was around $91
billion (Price, 1997). Most persons 65 years or older have some
form of health insurance. About 97 percent are covered by
Medicare or Medicaid, and most have supplementary coverage.
This appendix reports on the health status health care
expenditures and long-term care insurance of the elderly (see
section 3 for a discussion of health insurance supplementing
Medicare coverage).
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 1996 (see table B-1). Although
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 65-74 years in the 1970s, 1980s and
early 1990s (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 1950-96
[Remaining life expectancy in years]
----------------------------------------------------------------------------------------------------------------
At birth At 65 years At birth
---------------------------------------------------------------
Year Both Both
sexes Male Female sexes Male Female White Black
----------------------------------------------------------------------------------------------------------------
1950 \1\........................................ 68.2 65.6 71.1 13.9 12.8 15.0 69.1 60.7
1960 \1\........................................ 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
1993............................................ 75.5 72.2 78.8 17.3 15.3 18.9 76.3 69.2
1994............................................ 75.7 72.4 79.0 17.4 15.5 19.0 76.5 69.5
1995............................................ 75.8 72.5 78.9 17.4 15.6 18.9 76.5 69.6
1996............................................ 75.9 72.7 79.0 17.5 15.7 19.0 76.6 69.9
----------------------------------------------------------------------------------------------------------------
\1\ Includes deaths of nonresidents of the United States in the 1950 and 1960 data.
Source: For the years 1950-95, National Center for Health Statistics (1997a, p. 108); for 1996, National Center
for Health Statistics (1997b).
TABLE B-2.--SELECTED HEALTH STATUS INDICATORS FOR PERSONS 65-74 YEARS OF AGE BY SEX, SELECTED PERIODS 1971-94
[Percent of population]
----------------------------------------------------------------------------------------------------------------
Male Female
Health status indicator -----------------------------------------------------
1971-74 1976-80 1988-94 1971-74 1976-80 1988-94
----------------------------------------------------------------------------------------------------------------
Hypertension \1\ \2\...................................... 67.2 67.1 57.3 78.3 71.8 60.8
High-risk serum cholesterol levels (Mean serum cholesterol
level, \3\ in mg/dL)..................................... 34.7
(226) 31.7
(221) 21.9
(212) 57.7
(250) 51.6
(246) 41.3
(233)
Overweight \4\............................................ 23.0 25.2 42.9 38.0 38.4 42.3
----------------------------------------------------------------------------------------------------------------
\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 (1997a, pp. 190-92).
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 75 Less $35,000
elderly 65-74 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 (1995a, 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.
Surveys on long-term care indicate that rates of chronic
disability among the elderly have declined significantly
(Manton, 1997). 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-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
----------------------------------------------------------------------------------------------------------------
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
---------------------------------------------------
All persons 65+ years \3\........................... 31,026 15.7 23.0 33.4 18.4 9.6
----------------------------------------------------------------------------------------------------------------
\1\ Includes unknown health status.
\2\ The categories related to this concept result from asking the respondent, ``Would you say your 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 (1995a, Table 70).
CAUSES OF DEATH FOR THE ELDERLY
Table B-5 shows the 10 leading causes of death for three
subgroups of the older population. In the United States, two-
thirds of elderly persons die from heart disease, cancer, or
stroke (National Center for Health Statistics, 1997c). Heart
disease was the major cause of death among the elderly in 1960,
and remains so today despite rapid declines in age-adjusted
death rates from heart disease that are due to improvements in
treatments as well as lifestyle changes. Cancer death rates
among the elderly, however, have risen during the same period,
due especially to increases in lung cancer deaths (National
Center for Health Statistics, 1997a). In 1995, heart disease
still accounted for 36 percent of all deaths among persons 65
and older, 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 1995, cerebrovascular disease
accounted for only 8 percent of all deaths in the 65 and older
age group (NCHS, 1997c).
TABLE B-5.--DEATH RATES FOR 10 LEADING CAUSES OF DEATH AMONG OLDER
PEOPLE BY AGE, 1995
[Death rates per 100,000 population in age group]
------------------------------------------------------------------------
Age
Rank Cause of death ---------------------------------------
65+ 65-74 75-84 85+
------------------------------------------------------------------------
1... Diseases of the heart..... 1,835 800 2,065 6,484
2... Malignant neoplasms....... 1,137 868 1,365 1,824
3... Cerebrovascular diseases.. 414 137 481 1,637
4... Chronic obstructive
pulmonary diseases....... 264 161 352 528
5... Pneumonia and influenza... 222 57 233 1,036
6... Diabetes.................. 133 87 163 278
7... Accidents................. 87 45 98 268
8... Alzheimer's disease....... 60 11 73 275
9... Nephritis, nephrotic
syndrome, nephrosis...... 60 25 73 207
10.. Septicemia................ 50 21 60 173
All other causes.......... 791 352 889 2,760
---------------------------------------
All causes................ 5,053 2,564 5,852 15,470
------------------------------------------------------------------------
Source: National Center for Health Statistics (1997c, tables 7 and 9).
Alzheimer's disease (AD) is now the eighth leading cause of
death for older people. Alzheimer's has only been classified as
a unique cause of death since 1979, so reported death rates
have been increasing rapidly since that year, and probably do
not yet reflect the actual numbers of deaths attributable to
the disease. Alzheimer's affects approximately 4 million
Americans at present, including about 12 percent of the
population over 65 and nearly half of those age 85 and older
(Hodes, 1997). Death rates from AD are also highly age related
(NCHS, 1997c). 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. 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 5 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 and 1995. 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 have increased at an average
annual rate of 12.1 percent, while the growth in total costs
(including enrollees' share of costs) is 10.5 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 76 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.
TABLE B-6.--REIMBURSEMENTS AND OUT-OF-POCKET COSTS UNDER MEDICARE, SELECTED YEARS 1975-95
[Incurred costs per HI or SMI enrollee]
----------------------------------------------------------------------------------------------------------------
Year Average
------------------------------------------- annual
rate of
Source growth
1975 1980 1985 1990 1995 1975-95
(percent)
----------------------------------------------------------------------------------------------------------------
(5)In current dollars
-----------------------------------------------------
Hospital insurance:
Reimbursement......................................... $466 $920 $1,570 $1,981 $3,201 10.1
Copayments............................................ 34 67 119 187 244 10.4
-----------------------------------------------------
Total............................................. 500 986 1,690 2,168 3,445 10.1
=====================================================
Supplementary medical insurance:
Reimbursement......................................... 186 399 766 1,307 1,819 12.1
Copayments............................................ 84 137 248 400 547 9.8
Balance billing....................................... 22 56 87 68 13 -2.6
-----------------------------------------------------
Total............................................. 291 592 1,101 1,775 2,379 11.1
=====================================================
Total Medicare reimbursement...................... 651 1,318 2,336 3,288 5,020 10.8
=====================================================
Total costs under Medicare........................ 792 1,579 2,791 3,944 5,824 10.5
-----------------------------------------------------
(5)In constant 1995 dollars
-----------------------------------------------------
Hospital insurance:
Reimbursement......................................... 1,263 1,703 2,225 2,310 3,201 4.8
Copayments............................................ 93 124 169 218 244 4.9
-----------------------------------------------------
Total............................................. 1,356 1,827 2,394 2,529 3,445 4.8
=====================================================
Supplementary medical insurance:
Reimbursement......................................... 503 738 1,085 1,524 1,819 6.6
Copayments............................................ 227 254 352 467 547 4.5
Balance billing....................................... 60 104 124 80 13 -7.4
-----------------------------------------------------
Total............................................. 790 1,097 1,560 2,071 2,379 5.7
=====================================================
Total Medicare reimbursement...................... 1,766 2,441 3,310 3,834 5,020 5.4
=====================================================
Total costs under Medicare........................ 2,147 2,924 3,955 4,599 5,824 5.1
=====================================================
Percent of costs paid by Medicare................. 82.3 83.5 83.7 83.4 86.2 0.2
----------------------------------------------------------------------------------------------------------------
Note.--The CPI-U was used to get constant dollars.
Source: Congressional Budget Office.
TABLE B-7.--ENROLLEE COSTS UNDER MEDICARE, SELECTED YEARS 1975-95
[Incurred costs per HI or SMI enrollee]
----------------------------------------------------------------------------------------------------------------
Year Average
--------------------------------------------- annual
rate of
Source growth
1975 1980 1985 1990 1995 1975-95
(percent)
----------------------------------------------------------------------------------------------------------------
(5)In current dollars
-------------------------------------------------------
Hospital insurance copayments........................... $34 $67 $119 $187 $244 10.4
Supplementary medical insurance copayments.............. 84 137 248 400 547 9.8
Balance billing......................................... 22 56 87 68 13 -2.6
-------------------------------------------------------
Total direct costs.................................. 140 260 455 656 804 9.1
=======================================================
Premium costs........................................... 80 110 186 343 553 10.1
-------------------------------------------------------
Total enrollee costs................................ 221 371 641 999 1,357 9.5
=======================================================
Enrollee per capita income \1\.......................... 5,158 8,431 12,767 15,454 16,460 6.0
-------------------------------------------------------
(5)In constant 1995 dollars
-------------------------------------------------------
Hospital insurance copayments........................... 93 124 169 218 244 4.9
Supplementary medical insurance copayments.............. 227 254 352 467 547 4.5
Balance billing......................................... 60 104 124 80 13 -7.4
-------------------------------------------------------
Total direct costs.................................. 381 482 644 765 804 3.8
=======================================================
Premium costs........................................... 218 204 264 400 553 4.8
-------------------------------------------------------
Total enrollee costs................................ 599 687 908 1,165 1,357 4.2
=======================================================
Enrollee per capita income \1\.......................... 13,983 15,613 18,094 18,024 16,460 0.8
-------------------------------------------------------
(5)Percent of costs under Medicare paid by enrollees, by
source of payment
-------------------------------------------------------
Hospital insurance copayments........................... 4.4 4.2 4.3 4.7 4.2 -0.2
Supplementary medical insurance copayments.............. 10.6 8.7 8.9 10.1 9.4 -0.6
Balance billing......................................... 2.8 3.6 3.1 1.7 0.2 -12.4
-------------------------------------------------------
Total direct costs.................................. 17.7 16.5 16.3 16.6 13.8 -1.2
=======================================================
Premium costs........................................... 10.2 7.0 6.7 8.7 9.5 -0.4
-------------------------------------------------------
Total enrollee costs................................ 27.9 23.5 23.0 25.3 23.3 -0.9
=======================================================
Enrollee-paid costs as a percent of enrollee per capita
income \1\............................................. 4.3 4.4 5.0 6.5 8.2 3.3
----------------------------------------------------------------------------------------------------------------
\1\ From the Current Population Survey, with income adjusted for underreporting.
Note.--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, 1975-95
----------------------------------------------------------------------------------------------------------------
Year Average
---------------------------------------- annual
rate of
growth
1975 1980 1985 1990 1995 1975-95
(percent)
----------------------------------------------------------------------------------------------------------------
(5)In current dollars
--------------------------------------------------
Hospital insurance:
Hospital deductible...................................... $92 $180 $400 $592 $716 10.8
Supplementary medical insurance:
Annual deductible........................................ 60 60 75 75 100 2.6
Monthly premium \1\...................................... 6.70 9.20 15.50 28.60 46.10 10.1
--------------------------------------------------
(5)In constant 1995 dollars
--------------------------------------------------
Hospital insurance:
Hospital deductible...................................... 249 333 567 690 716 5.4
Supplementary medical insurance:
Annual deductible........................................ 163 111 106 87 100 -2.4
Monthly premium \1\...................................... 18.16 17.04 21.97 33.36 46.10 4.8
----------------------------------------------------------------------------------------------------------------
\1\ The 1980 supplementary medical insurance monthly premium amount is the average of values for the first and
second halves of the year.
Note.--The CPI-U was used to calculate constant dollars.
Source: Congressional Budget Office.
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 82.3 percent in 1975
and 86.2 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).
Enrollees are spending an increasing share of their income
for Medicare's cost sharing and premium charges. In 1975, about
4.3 percent of enrollees' per capita income went to cover their
share of acute health care costs under Medicare. By 1995, this
figure had risen to 8.2 percent.
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-1 illustrates direct household
spending for health care as a percentage of household income
before taxes for elderly
CHART B-1. DIRECT HOUSEHOLD SPENDING FOR HEALTH CARE AS A PERCENTAGE OF
HOUSEHOLD INCOME, BY TYPE OF HOUSEHOLD, 1985-95
Notes._Direct household spending for health care includes
the amount directly paid for health insurance premiums by a
household, as well as other out-of-pocket spending for health
care services, including deductibles and copayments.
Elderly households are those in which the primary owner or
renter of the household is 65 or older. Such households may
include individuals younger than 65. Nonelderly households are
those in which the primary owner or renter of the household is
younger than 65. Such households may include individuals age 65
or older.
Although expenditures for health care by the institutional
population are not collected by the CES, if a member residing
in the household contributes to health-related expenses of an
institutionalized person, then those expenditures are counted
as direct household spending for health care.
Household income refers to income before taxes.
Source: Congressional Budget Office calculations based on
data from the Consumer Expenditure surveys (CES) of the Bureau
of Labor Statistics, 1985-95.
and nonelderly households for years 1985-95. In 1995, direct
household spending for health care as a percentage of household
income for elderly households was 12.0 percent, on average, up
from 10.4 percent in 1985. Over the same period, nonelderly
households spent around 3.6 percent of their household income
for health care.
CHANGES IN REAL SPENDING PER MEDICARE ENROLLEE, 1967-95
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.
TABLE B-9.--REAL SPENDING PER MEDICARE ENROLLEE, FISCAL YEARS 1967-95
[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......................................................... 3,684 2,171 1,427 1,994 85 93 283 1,141
1990......................................................... 3,912 2,324 1,506 2,097 99 130 303 1,199
1991......................................................... 3,882 2,257 1,544 1,999 82 179 313 1,228
1992......................................................... 4,187 2,526 1,570 2,164 116 248 346 1,221
1993......................................................... 4,392 2,699 1,610 2,238 156 309 370 1,237
1994......................................................... 4,684 2,888 1,710 2,303 201 388 402 1,304
1995......................................................... 4,951 3,077 1,720 2,375 248 459 425 1,361
------------------------------------------------------------------------------------------
(7)Average annual growth rates (in percent)
------------------------------------------------------------------------------------------
1975-1980.................................................... 6.8 6.1 9.4 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 20.0 28.6 7.0 2.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.
Spending for skilled nursing facilities (SNFs) increased
significantly. During the period from 1975 through 1985, real
spending per enrollee for SNFs was falling. This trend was
reversed during the late 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.
OUT-OF-POCKET SPENDING BY MEDICARE BENEFICIARIES
In 1992, Medicare covered approximately 53 percent of the
health care expenditures of program beneficiaries (55 percent
for the aged and 43 percent for the disabled). The majority of
beneficiaries had other coverage, either through private
insurance or public programs, to supplement their Medicare
protection. Medicaid paid an additional 14 percent of the
health costs of the Medicare population while private insurance
covered 10 percent and other sources (such as the Veterans
Administration) covered an additional 5 percent. (For a
discussion of supplemental coverage see section 3, Medicare.)
However, beneficiaries still financed 20 percent of their
medical bills through out-of-pocket payments to health care
providers. The proportion of expenditures that beneficiaries
paid out of pocket varied by service category, ranging from 2
percent for hospital services to 57 percent for prescription
drugs and 83 percent for dental care. Beneficiaries also paid
approximately 36 percent of their long-term facility care costs
out of pocket (Lashober and Olin, 1996).
In 1992, the estimated average out-of-pocket expenditure
for a noninstitutionalized beneficiary not enrolled in a
managed care plan was $1,833 (PPRC, 1997). In 1996, the
estimated out-of-pocket expenditure (using a different data
base) was $2,605 (Moon, Kuntz & Pounder, 1996). Out-of-pocket
payments include expenditures for Medicare's cost-sharing
charges, payments for services not covered by Medicare or
supplemental insurance. Over half of out-of-pocket expenditures
are for private insurance premiums and Medicare part B premiums
(see table B-10).
Beneficiaries with greater supplemental coverage also have
higher out-of-pocket costs. For example, noninstitutionalized
fee-for-service beneficiaries who paid out of pocket toward the
costs of individually purchased and employer-provided
supplemental insurance spent an average of $2,638 in 1992.
Those noninstitutionalized fee-for-service beneficiaries who
had no supplemental coverage spent an average of $1,294 out of
pocket in 1992 (PPRC, 1997).
An analysis of 1996 data shows that out-of-pocket costs
represented 21 percent of household income for the elderly.
Out-of-pocket spending ranged from 11 percent of household
income for the high-income group, 18 percent for the middle
income, 26 percent for the low income, 30 percent for the poor,
and 31 percent of income for the near poor (Moon et al., 1996).
TABLE B-10.--DISTRIBUTION OF AVERAGE OUT-OF-POCKET EXPENDITURES, BY
CATEGORY OF SERVICES, 1992
------------------------------------------------------------------------
Category Percentage
------------------------------------------------------------------------
Medical provider.......................................... 16
Prescription drugs........................................ 16
Dental..................................................... 7
Other services............................................. 5
Supplemental insurance premiums............................ 38
Medicare part B premiums................................... 18
------------
Total.................................................. 100
------------------------------------------------------------------------
Note.--Excludes out-of-pocket spending by institutionalized
beneficiaries and those enrolled in managed care plans.
Source: Physician Payment Review Commission, 1997.
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 about 65 percent of those elderly persons living in
the community and needing long-term care assistance rely
exclusively on unpaid 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 3 ADLs or required substantial supervision due to
cognitive impairment or other behavioral problem. The remaining
3.6 million resided in the community with 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 and
older 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 $91
billion in 1995. Federal and State governments account for the
bulk of this spending, $55 billion or 60 percent of the total.
TABLE B-11.--ELDERLY LONG-TERM CARE EXPENDITURES BY SOURCE OF PAYMENT,
1995
[In billions of dollars]
------------------------------------------------------------------------
Source of spending Amount
------------------------------------------------------------------------
Nursing home care:
Medicaid............................................... $24.2
Medicare............................................... 8.4
Other Federal.......................................... 0.7
Other State and local.................................. 0.6
Out-of-pocket payments................................. 30.0
Private insurance...................................... 0.4
------------
Total.............................................. 64.4
============
Home and community-based care:
Medicaid............................................... 4.3
Medicare............................................... 14.3
Other Federal.......................................... 1.7
Other State and local.................................. 0.5
Out-of-pocket payments................................. 5.5
Private insurance...................................... 0.3
------------
Total.............................................. 26.5
============
Total long-term care........................... 90.9
------------------------------------------------------------------------
Source: The Lewin Group for the Office of the Assistant Secretary for
Planning and Evaluation.
Approximately 70 percent 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 84 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 $40,000 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 0.6 percent of total spending for nursing
home care in 1995. (Private long-term care insurance is
discussed in additional detail below.)
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 1995, spending on
home care for the elderly amounted to $26.5 billion, or 30
percent 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 or other
skills and rehabilitation services following a hospitalization.
Many people who require long-term nursing home care do not need
daily skilled care, and, therefore, do not qualify for
Medicare's benefit. As a result of this restriction, Medicare
paid for 13 percent of the elderly's nursing home spending in
1995.
For similar reasons, Medicare pays for only limited--albeit
rapidly 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 25 percent of
total program spending in 1995.
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 $24.1 billion of $36.5
billion, was for nursing home care in fiscal year 1995. Much
smaller amounts were spent for various home care services--$3.0
billion, or 8 percent of total spending for the elderly, in
fiscal year 1995. 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 SPENDING FOR PEOPLE ELIGIBLE ON
THE BASIS OF BEING AGE 65 OR OLDER, FISCAL YEAR 1995
[Amounts in millions of dollars]
------------------------------------------------------------------------
Percent of
Service category Payments total
------------------------------------------------------------------------
Nursing homes.................................. $24,146 66.2
Home care services............................. 2,990 8.2
Prescription drugs............................. 2,861 7.8
Inpatient hospital............................. 2,034 5.6
Inpatient mental health........................ 1,178 3.2
Intermediate care facility..................... 637 1.7
Physician services............................. 617 1.7
Outpatient hospital............................ 508 1.4
Clinic services................................ 258 0.7
Other practitioner............................. 96 0.3
Laboratory and radiology....................... 73 0.2
Dental services................................ 61 0.2
Rural health clinics........................... 11 0.0
Other services................................. 1,011 2.8
------------------------
Total expenditures....................... 36,482 100.0
------------------------------------------------------------------------
Source: Congressional Research Service analysis of data from the HCFA
form 2082.
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 a spend down option and other more liberal financial
eligibility standards that States may use for covering persons
needing institutional care and having 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
1997, 300 percent of $484, or $1,452 a month).
A June 1996 study, ``Spending Down to Medicaid: New Data
on the Role of Medicaid in Paying for Nursing Home Care''
(Wiener, Sullivan, & Skaggs) confirms that Medicaid's coverage
of nursing home care provides a significant safety net for the
middle class as well as for the poor. This study calculated
three different measures of Medicaid spend down using surveys
that tracked persons who were discharged from nursing homes as
well as current residents of facilities during a 5-year period.
The first method used by the study examined discharged and
current residents who were private payers at admission and
calculated the proportion who were Medicaid at discharge or at
the end of the followup period. More formally, the numerator
for this method is all persons who are eligible for Medicaid at
some point during their nursing home stays and the denominator
is all persons who start their nursing home stays as private
payers. The second method examined discharged and current
residents who were Medicaid at discharge or at the end of the
followup period and determined what proportion were private pay
at the beginning of their nursing home stay. The numerator for
this method is all persons receiving Medicaid at discharge or
at the end of a followup period who began their stays as
private-pay residents, while the denominator is all persons
receiving Medicaid at discharge or at the end of the followup
period. The third method examined total discharged and current
residents and calculated what proportion began their stays as
private-pay residents but were Medicaid eligible at discharge
or at the end of the followup period. Here the numerator is all
persons receiving Medicaid at discharge or at the end of the
followup period who began their nursing home stays as private-
pay residents, while the denominator is all persons who have
nursing home stays.
The study found:
1. For discharged nursing home residents, approximately one-
third of those admitted as private-pay residents
eventually spent down to Medicaid (spend down method
1). Just over one-quarter of Medicaid discharged
residents began their nursing home stays as private-pay
residents (spend down method 2). About one-seventh of
all discharged nursing home residents spent down to
Medicaid at some time during their stays (spend down
method 3).
2. For current residents, almost half of those admitted as
private-pay residents eventually spent down to Medicaid
(spend down method 1). Just over one-quarter of current
residents eligible for Medicaid at some point began
their nursing home stays as private-pay residents
(spend down method 2). One-fifth of all current
residents spent down at some point during their stays
(spend down method 3).
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 1995, the Health Insurance Association
of America (Coronel & Kitchman, 1997) found that more than 4.35
million policies had been sold, with 125 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
covered 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 have
always raised issues about the quality of coverage offered
purchasers of policies. The insurance industry has responded to
these concerns by offering new products that have provided
broadened coverage and fewer restrictions. In addition, the
National Association of Insurance Commissioners (NAIC) has
established a model act and model regulations for long-term
care insurance products sold within their jurisdictions. All
States have adopted at least some portion of these standards to
protect purchasers of these policies.
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. HIAA reports on the premium
costs of policies representing 80 percent of all policies sold
in the individual and group association markets in 1995. 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 1995 were $1,881 when purchased at the age
of 65 and $5,889 when purchased at the age of 79. Many elderly
people cannot afford these premiums.
The insurance industry believes that affordability of
premiums can be greatly enhanced if the pool of those to whom
policies are sold is expanded. The industry has argued that the
greatest potential for expanding the pool 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. For example, the
policy described above had an average annual premium of $798
when purchased at the age of 50. In addition, group coverage
has lower administrative expenses.
According to HIAA, employer-based activity has increased
steadily over the years. By the end of 1995, over 530,000
policies had been sold across 1,260 employers. These employer-
based plans covered employees, their spouses, retirees,
parents, and parents-in-law. In addition, the number of long-
term care riders that permit conversion of at least some
portion of life insurance policies to long-term care benefits
has grown from 1,300 policies in 1988 to a cumulative total of
334,000 in 1995.
But just how broad-based employer interest is in a new
long-term care benefit is unclear. Many employers currently
face large unfunded liabilities for retiree pension and health
benefits. Employers are also concerned about benefit costs for
their labor force. Of those employers sponsoring a long-term
care insurance plan, less than half were making contributions
to the premium cost of a policy, and almost all of those who
had made contributions were very small firms (under 100
employees), buying a base policy from the same long-term care
insurance company (Unum), with an option for employees to
upgrade the policy. The majority of employers sponsoring plans
require that the employee pay the full premium cost of
coverage.
Those advocating private long-term care insurance as a
solution to long-term care financing issues have argued that
the uncertain tax treatment of long-term care insurance in the
Tax Code has been a hindrance to market acceptance. In
addition, tax incentives may encourage more employers to offer
a long-term care insurance benefit and may help reduce the high
premium costs of policies for some elderly persons. Over the
years, numerous bills were introduced to clarify the tax
treatment of long-term care insurance and long-term care
expenses in the Tax Code. The substance of these proposals was
included in Public Law 104-191, the Health Insurance
Portability and Accountability Act of 1996, as signed into law
August 21, 1996.
Effective January 1, 1997, Public Law 104-191 amends the
Tax Code to treat private long-term care policies and long-term
care expenses the way health insurance policies and health care
expenses are currently treated under the Code. These changes
have several different dimensions.
1. Amounts received under a qualified long-term care insurance
plan will be considered medical expenses and excluded
from gross income. (Per diem policies that pay benefits
on the basis of disability and not actual services
used, however, would be subject to a cap. The amount of
the dollar cap is $175 per day per person, indexed for
inflation. In the event that a person has both a per
diem disability policy and another policy that
reimburses for services actually used, then this cap
amount is reduced by the amount of reimbursements and
payments received by anyone for the cost of qualified
long-term care services for the chronically ill
individual. If more than one person receives payments
for services needed by the insured person, then all
such persons are treated as one person for purposes of
the dollar cap. If payments under long-term care
insurance plans exceed the dollar cap, then the excess
is excluded from income subject to taxation only to the
extent the individual has incurred actual costs for
long-term care services in excess of the dollar cap.
Amounts in excess of the dollar cap, with respect to
which no actual costs were incurred for long-term care
services, are fully includable in income and subject to
taxation.)
2. Contributions of an employer to the cost of qualified long-
term care insurance premiums will be excluded from the
gross income of the employee, and will, therefore, be
exempt from tax to the employee (so long as they do not
exceed certain annual dollar limits that vary with the
insured person's age). This favorable tax treatment,
however, is not extended to employer-sponsored
cafeteria plans or flexible spending arrangements.
(Long-term care insurance premiums paid by an employer
would continue to be tax deductible as a business
expense for the employer, as they are under current
law.)
3. Out-of-pocket (i.e., unreimbursed) long-term care expenses
(including premium costs within age-adjusted limits)
will be allowed as itemized deductions, to the extent
they and other unreimbursed medical expenses exceed 7.5
percent of adjusted gross income.
4. Self-employed individuals will be allowed to include the
premium costs of long-term care insurance in
determining their allowable deduction for health
insurance expenses. Only amounts not exceeding age-
adjusted limits can be included. The deduction for
health insurance expenses rises from 40 percent of the
amount paid in 1997 to 80 percent in 2006 and years
thereafter.
A qualified long-term care insurance plan is defined as a
contract that covers only long-term care services; does not pay
or reimburse expenses covered under Medicare; is guaranteed
renewable; does not provide for a cash surrender value or other
money that can be paid, assigned, or pledged as collateral for
a loan, or borrowed; applies all refunds of premiums and all
policyholder dividends or similar amounts as a reduction in
future premiums or to increase future benefits; and meets
certain consumer protection standards. Policies issued before
January 1, 1997, and meeting a State's long-term care insurance
requirements at the time the policy was issued would be
considered a qualified plan for purposes of favorable tax
treatment.
Qualified long-term care services are defined as necessary
diagnostic, preventive, therapeutic, curing, treating,
mitigating, and rehabilitative services, and maintenance or
personal care services, which are required by a chronically ill
individual, and are provided according to a plan of care
prescribed by a licensed health care practitioner. However,
amounts paid for services provided by the spouse of a
chronically ill person or by a relative directly or through a
partnership, corporation, or other entity) will not be
considered a medical expense eligible for favorable tax
treatment, unless the service is provided by a licensed
professional.
Chronically ill persons are those individuals unable to
perform, without substantial assistance from another
individual, at least two of six specified ADLs for a period of
at least 90 days due to a loss of functional capacity. The six
specified ADLs include bathing, dressing, transferring,
toileting, eating, and continence. Furthermore, the number of
ADLs that are taken into account under a plan may not be less
than five of those specified above. In other words, a plan does
not meet the definition if it requires that an individual be
unable to perform two out of any four of the activities listed
in the bill. Public Law 104-191 also defines chronically ill
persons as including those having a level of disability similar
(as determined by the Secretary of the Treasury in consultation
with the Secretary of HHS) to the level of disability specified
for functional impairments, as well as those requiring
substantial supervision to protect them from threats to health
and safety due to severe cognitive impairment. Persons are
required to be certified by a licensed health practitioner
within the preceding 12-month period in order to meet these
definitional requirements.
Public Law 104-191 also amends the Tax Code to extend
favorable tax treatment to accelerated death benefits received
by chronically ill persons (as defined above) and terminally
ill persons under life insurance policies. Many life insurance
policies now contain clauses or riders allowing part of the
value of death benefits to be paid because of impending death
instead of waiting until actual death. These accelerated death
benefits are calculated based on the benefits that would be
paid at death, discounted to the time of actual payment based
on the projected time of death and an agreed discount rate.
Under current tax law (i.e., before January 1, 1997), benefits
paid because of the death of the insured are generally not
taxable, but the proceeds from cashing in or selling a life
insurance policy are taxable if they exceed the cost of the
policy, just as for the sale of any asset. For the chronically
and terminally ill, Public Law 104-191 excludes from gross
income, and taxation, (1) amounts received as accelerated death
benefits and (2) amounts received for the sale or assignment of
a life insurance policy to a qualified viatical settlement
provider, i.e., companies which are regularly engaged in the
trade or business of purchasing or taking assignment of life
insurance policies on the lives of insured persons who are
chronically or terminally ill and which meet certain specified
requirements. The exclusion is limited to payments for long-
term care services not compensated for by insurance or
otherwise.
In addition to Tax Code clarifications, 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 might 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 a 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 insurance
payouts and obtain Medicaid coverage for the care they need,
after their private policies had ceased providing coverage.
Eight States (California, Connecticut, Illinois, Indiana,
Iowa, Maryland, New York, and Washington) 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 private and public, 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, since 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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