United States Government Accountability Office

GAO Testimony 

Before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives 

LONG-TERM CARE 

FINANCING 

Growing Demand and Cost 

of Services Are Straining 

Federal and State Budgets 

Statement of Kathryn G. Allen 

Director, Health Care—Medicaid 

 and Private Health Insurance Issues 

For Release on Delivery

Expected at 10:00 a.m. EDT 

Wednesday, April 27, 2005

 

GAO-05-564T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 27, 2005

LONG-TERM CARE FINANCING

Growing Demand and Cost of Services 

Highlights of GAO-05-564T, a testimony Are Straining Federal and State Budgets 

before the Subcommittee on Health, 

Committee on Energy and Commerce, 

House of Representatives

Long-term care relies heavily on 

financing by public payers,

especially Medicaid, and has 

significant implications for state 

budgets as well as the federal

budget. It includes an array of

health, personal care, and

supportive services provided to

persons with physical or mental 

disabilities. As the baby boom 

generation ages, the number of 

elderly with disabilities will greatly 

expand the demand for long-term 

care services and will impose

greater burdens on federal and 

state budgets. 

GAO was asked to discuss the 

budgetary and other challenges 

resulting from the anticipated

increase in demand for long-term 

care services. This testimony

addresses (1) the pressure that

entitlement spending for Medicare,

Medicaid, and Social Security is

expected to exert on the federal

budget in coming decades; (2) how 

the aging of the baby boom

population will increase the 

demand for long-term care

services; and (3) how these trends

will affect the current and future

financing of long-term care 

services, particularly in federal and 

state budgets. The testimony also 

highlights several considerations 

for any possible reforms of longterm care financing. This

testimony updates prior GAO work,

particularly Long-Term Care: 

Aging Baby Boom Generation Will 

Increase Demand and Burden on 

Federal and State Budgets, GAO02-544T (Washington, D.C.: March

21, 2002). 

Over the coming decades, entitlement spending for Medicare, Medicaid, and 

Social Security is expected to absorb larger shares of federal revenue and 

threatens to crowd out other spending as the baby boom generation enters 

retirement age. The increasing demand for long-term care services fueled in

part by the baby boom generation will also further strain federal and state 

budgets. Estimates suggest the future number of disabled elderly who 

cannot perform basic activities of daily living without assistance may as 

much as double from 2000 through 2040, resulting in a large increase in 

demand for long-term care services. Spending on long-term care services

just for the elderly is estimated to increase by more than two-and-a-half 

times between 2000 and 2040, and could nearly quadruple in constant dollars 

between 2000 and 2050 to $379 billion, according to some estimates. 

Without fundamental financing changes, Medicaid can be expected to 

remain one of the largest funding sources, straining both federal and state 

governments. 

Financing the increasing demand for long-term care services will be a

significant 21st century challenge for the nation. A key question for 

policymakers will be to consider what options exist for rethinking the 

federal, state, and private roles in financing long-term care. In considering 

options for reforming long-term care financing, GAO notes that long-term 

care is not just about health care. It also comprises a variety of services an 

aged or disabled person requires to maintain quality of life—including 

housing, transportation, nutrition, and social support to help maintain 

independent living. Given the challenges in providing and paying for these 

myriad and growing needs, GAO has identified several considerations for 

shaping reform proposals that include: 

• determining societal responsibilities; 

• considering the potential role of social insurance in financing;

• encouraging personal preparedness; 

• recognizing the benefits, burdens, and costs of informal caregiving; 

• assessing the balance of state and federal responsibilities to ensure 

adequate and equitable satisfaction of needs; 

• adopting effective and efficient implementation and administration of 

reforms; and

• developing financially sustainable public commitments. 

www.gao.gov/cgi-bin/getrpt?GAO-05-564T.

To view the full product, click on the link 

above. For more information, contact Kathryn 

G. Allen at (202) 512-7118. 
Mr. Chairman and Members of the Subcommittee: 

I am pleased to be here today as you discuss the anticipated growing 

demand and associated costs for long-term care services, which will be 

driven largely by the aging baby boom generation, and the challenges that 

increased demand will bring for federal and state budgets. Earlier this 

year, we issued a report entitled 21st Century Challenges: Reexamining

the Base of the Federal Government to provide policymakers with a 

comprehensive compendium of those areas throughout government that 

could be considered ripe for reexamination and review based on our past 

work and institutional knowledge.1

 In that report, we presented illustrative 

questions for policymakers to consider as they carry out their 

responsibilities. These questions examined major areas of the budget and 

federal operations including discretionary and mandatory spending, and 

tax policies and programs. One prominent question that we raised in that

report and that will be the focus of my comments today is “What options 

are there for rethinking the federal, state, and private insurance roles in 

financing long-term care?” 

In general, the aging of the baby boom generation will lead to a sharp 

growth in federal entitlement spending that, absent meaningful reforms, 

will represent an unsustainable burden on future generations. As the 

estimated 76 million baby boomers born between 1946 and 1964 become 

elderly, Medicare, Medicaid, and Social Security will nearly double as a 

share of the economy by 2035. We have been able to sustain these 

entitlements in the past with low depression-era birth rates and a large 

postwar workforce. However, absent substantive reform of entitlement 

programs, a rapid escalation of federal spending for Social Security, 

Medicare, and Medicaid is virtually certain to overwhelm the rest of the 

federal budget. 

Most attention has been focused on the need for Social Security and 

Medicare reform in order to maintain their viability and ability to meet 

programmatic commitments. By 2017, Social Security’s cash income (tax 

revenue) is projected to fall below program expenses. At that time, Social

Security will join Medicare’s Hospital Insurance Trust Fund, whose 

outlays exceeded cash revenues in 2004, as having a cash flow deficit. 

While these are important issues, a broader focus should also include 

 1

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 

Page 1 GAO-05-564T
Medicaid, particularly as it involves financing long-term care. Long-term 

care includes an array of health, personal care, and supportive services 

provided to persons with physical or mental disabilities. It relies heavily 

on financing by public payers, especially Medicaid, and has significant 

implications for state budgets as well as the federal budget. 

My remarks today will focus on (1) the pressure that entitlement spending 

for Medicare, Medicaid, and Social Security is expected to exert on the 

federal budget in coming decades; (2) how the aging of the baby boomers 

will increase the demand for long-term care services; and (3) how these 

trends will affect the current and future financing of long-term care 

services, particularly in federal and state budgets. I will also highlight 

several considerations for any possible reforms of long-term care 

financing. My comments are based on prior GAO work, particularly a 2002 

testimony by the Comptroller General.2

 We updated prior GAO work by 

including more recent data from GAO’s budget simulation model, the 

Centers for Medicare & Medicaid Services, and the U.S. Census Bureau as 

well as the literature. We conducted our work to update this earlier 

testimony from February through April 2005 in accordance with generally 

accepted government auditing standards. 

In summary, it is clear that, taken together, Medicare, Medicaid, and Social

Security represent an unsustainable burden on future generations. 

Increased demand for long-term care, which will be driven in part by the 

aging baby boom generation, will contribute further to federal and state 

budget burdens. Estimates suggest the number of disabled elderly who 

cannot perform basic activities of daily living without assistance may as 

much as double from 2000 through 2040. Current problems with the 

provision and financing of long-term care could be exacerbated by the

swelling numbers of the baby-boom generation needing care. These 

problems include whether individuals with disabilities receive adequate 

services, the potential for families to face financially catastrophic longterm care costs, and the burdens and social costs that heavy reliance on 

unpaid care from family members and other informal caregivers create 

coupled with possibly fewer caregivers available in coming generations. 

Long-term care spending from all public and private sources, which was 

about $183 billion for persons of all ages in 2003, will increase dramatically

in the coming decades as the baby boom generation ages. Spending on 

 2

GAO, Long-Term Care: Aging Baby Boom Generation Will Increase Demand and Burden

on Federal and State Budgets, GAO-02-544T (Washington, D.C.: March 21, 2002). 

Page 2 GAO-05-564T
long-term care services just for the elderly is estimated to increase from 

2000 by more than two-and-a-half times by 2040 and could nearly 

quadruple in constant dollars to $379 billion by 2050, according to some 

estimates. Without fundamental financing changes, Medicaid—which pays 

over one-third of long-term care expenditures for the elderly—can be 

expected to remain one of the largest funding sources, straining both 

federal and state governments. 

In considering options for reforming long-term care financing in light of

these anticipated demands for assistance and budgeting stresses, it is 

important to keep in mind that long-term care is not just about health care. 

It also comprises a variety of services an aged and/or disabled person 

requires to maintain quality of life—including housing, transportation, 

nutrition, and social support to help maintain independent living. Given 

the challenges in providing and paying for these myriad and growing 

needs, several considerations for shaping reform proposals include: 

• determining societal responsibilities; 

• considering the potential role of social insurance in financing;

• encouraging personal preparedness;

• recognizing the benefits, burdens, and costs of informal caregiving; 

• assessing the balance of state and federal responsibilities to ensure 

adequate and equitable satisfaction of needs; 

• adopting effective and efficient implementation and administration of 

reforms; and

• developing financially sustainable public commitments. 

Long-term care includes many types of services needed when a person has

a physical or mental disability. Individuals needing long-term care have 

varying degrees of difficulty in performing some activities of daily living 

without assistance, such as bathing, dressing, toileting, eating, and moving 

from one location to another. They may also have trouble with 

instrumental activities of daily living, which include such tasks as 

preparing food, housekeeping, and handling finances. They may have a 

mental impairment, such as Alzheimer’s disease, that necessitates 

assistance with tasks such as taking medications or supervision to avoid

harming themselves or others. Although a chronic physical or mental 

disability may occur at any age, the older an individual becomes, the more 

likely a disability will develop or worsen. 

Background 

Page 3 GAO-05-564T
According to the 1999 National Long-Term Care Survey, approximately 

7 million elderly had some sort of disability in 1999, including about 

1 million needing assistance with at least five activities of daily living.3

Assistance takes place in many forms and settings, including institutional 

care in nursing homes or assisted living facilities, and home care services. 

Further, many disabled individuals rely exclusively on unpaid care from 

family members or other informal caregivers. 

Nationally, spending from all public and private sources for long-term care 

for all ages totaled about $183 billion in 2003, accounting for about 13 

percent of all health care expenditures.4

 About 69 percent of expenditures 

for long-term care services were paid for by public programs, primarily 

Medicaid and Medicare. Individuals financed about 20 percent of these 

expenditures out of pocket and, less often, private insurers paid for longterm care. Moreover, these expenditures did not include the extensive 

reliance on unpaid long-term care provided by family members and other 

informal caregivers. Figure 1 shows the major sources financing these 

expenditures. 

 3

See Kenneth G. Manton and XiLiang Gu, “Changes in the Prevalence of Chronic Disability 

in the United States Black and NonBlack Population Above Age 65 from 1982 to 1999,” 

Proceedings of the National Academy of Sciences of the United States of America, vol. 98, 

no. 11, (2001). The National Long-Term Care Survey was conducted in 1982, 1984, 1989,

1994, 1999, and 2004, but the 2004 results are not yet available. 

4

Based on our analysis of data from the Office of the Actuary of the Centers for Medicare &

Medicaid Services and The MEDSTAT Group. These figures include long-term care for all 

people, regardless of age. 

Page 4 GAO-05-564T
Figure 1: Funding Sources for Long-Term Care, 2003 

Notes: Amounts do not include unpaid care provided by family members or other informal caregivers. 

Percentages do not add to 100 percent due to rounding. 

Medicaid, the joint federal-state health-financing program for low-income 

individuals, continues to be the largest funding source for long-term care. 

Medicaid provides coverage for poor persons and for many individuals 

who have become nearly impoverished by “spending down” their assets to 

cover the high costs of their long-term care. For example, many elderly

persons become eligible for Medicaid as a result of depleting their assets 

to pay for nursing home care that Medicare does not cover. In 2003, 

Medicaid paid 48 percent (about $87 billion) of total long-term care 

expenditures. States share responsibility with the federal government for 

Medicaid, paying on average approximately 43 percent of total Medicaid 

costs in fiscal year 2002.5

 Eligibility for Medicaid-covered long-term care 

services varies widely among states. Spending also varies across states—

for example, in fiscal year 2000, Medicaid per capita long-term care 

expenditures ranged from $73 per year in Nevada to $680 per year in New 

York. For the national average, about 57 percent of Medicaid long-term 

20%

9%

3%

3%

18%

48%

Source: GAO analysis of 2003 data from the Centers for Medicare & Medicaid Services and The MEDSTAT Group. 

Public payers

Out of pocket

Private insurance

Other private

Other public

Medicare

Medicaid

 5

The federal share of Medicaid funding varies by state and is based on a state’s per capita 

income in relation to the national per capita income. By statute, the federal share of 

Medicaid expenditures across individual states may range from 50 to 83 percent. 42 U.S.C.

§ 1396 d (b) (2000). 

Page 5 GAO-05-564T
care spending in 2002 was for the elderly. In 2003, nursing home 

expenditures dominated Medicaid long-term care expenditures, 

accounting for about 47 percent of its long-term care spending. Home care 

expenditures make up a growing share of Medicaid long-term care 

spending as many states use the flexibility available within the Medicaid 

program to provide long-term care services in home- and communitybased settings.6

 From 2000 through 2003, home and personal care 

expenditures grew at an average annual rate of 15.9 percent compared 

with 4.0 percent for nursing facility spending. Expenditures for Medicaid 

home- and community-based services for long-term care almost doubled 

from 1998 to 2003—from about $10 billion to about $19 billion. 

Other significant long-term care financing sources include: 

• Individuals’ out-of-pocket payments, the second largest source of longterm care expenditures, accounted for 20 percent (about $38 billion) of 

total expenditures in 2003. The vast majority (82 percent) of these 

payments were used for nursing home care. 

• Medicare spending accounted for 18 percent (about $33 billion) of total 

long-term care expenditures in 2003. While Medicare primarily covers 

acute care, it also pays for limited stays in post-acute skilled nursing care 

facilities and home health care. 

• Private insurance, which includes both traditional health insurance and

long-term care insurance,7

 accounted for 9 percent (about $16 billion) of 

long-term care expenditures in 2003. 

 6

Through Medicaid home- and community-based services, states cover a wide variety of

nonmedical and social services and supports that allow people to remain in the community. 

These services include personal care, personal call devices, homemakers’ assistance, chore 

assistance, adult day health care, and other services that are demonstrated as cost-effective

and necessary to avoid institutionalization. In their home- and community-based services

programs, however, states often limit eligibility or the scope of services in order to control 

costs.

7

Private long-term care insurance commonly includes policies that provide coverage for at

least 12 months of necessary services—as demonstrated by an inability to perform a

certain number of activities of daily living—provided in settings other than acute-care 

hospital units. 

Page 6 GAO-05-564T
Before focusing on the increased burden that long-term care will place on

federal and state budgets, it is important to look at the broader budgetary 

context. As we look ahead we face an unprecedented demographic 

challenge with the aging of the baby boom generation. As the share of the 

population 65 and over climbs, federal spending on the elderly will absorb 

a larger and ultimately unsustainable share of the federal budget and 

economic resources. Federal spending for Medicaid, Medicare, and Social 

Security is expected to surge—nearly doubling by 2035—as people live 

longer and spend more time in retirement. In addition, advances in 

medical technology are likely to keep pushing up the cost of health care.

Moreover, the baby boomers will be followed by relatively fewer workers 

to support them in retirement, prompting a relatively smaller employment 

base from which to finance these higher costs. Based on CBO’s long-term 

Medicaid estimates, the federal share of Medicaid as a percent of GDP will 

grow from today’s 1.5 percent to 2.6 percent in 2035 and reach 4.8 percent 

in 2080. Under the 2005 Medicare trustees’ intermediate estimates, 

Medicare will almost triple as a share of gross domestic product (GDP) 

between now and 2035 (from 2.7 percent to 7.5 percent) and reach 13.8 

percent of GDP in 2080. Under the Social Security trustees’ intermediate 

estimates, Social Security spending will grow as a share of GDP from 

4.3 percent today to 6.3 percent in 2035, reaching 6.4 percent in 2080. (See

fig. 2.) Combined, in 2080 almost one-quarter of GDP will be devoted to 

federal spending for these three programs alone. 

Absent Reform, 

Spending for 

Medicaid, Medicare, 

and Social Security 

Will Put

Unsustainable 

Pressure on the 

Federal Budget 

Page 7 GAO-05-564T
Figure 2: Federal Spending for Medicaid, Medicare, and Social Security as a 

Percentage of GDP, 2000 through 2080 

Notes: Medicaid spending includes federal, but not state, expenditures. 

Social Security and Medicare projections based on the intermediate assumptions of the 2005 

Trustees’ Reports. Medicaid projections based on the Congressional Budget Office’s (CBO) January 

2005 short-term Medicaid estimates and the CBO’s December 2003 long-term Medicaid projections 

under midrange assumptions. 

To move into the future with no changes in federal health and retirement 

programs is to envision a very different role for the federal government. 

Our long-term budget simulations serve to illustrate the increasing 

constraints on federal budgetary flexibility that will be driven by 

entitlement spending growth. Assume, for example, that all expiring tax 

provisions are extended, revenue remains constant thereafter as a share of 

GDP, and discretionary spending keeps pace with the economy. Under 

these conditions, by 2040 federal revenues may be adequate to pay little 

more than interest on the federal debt.

8

 (See fig. 3.)

0

5

10

15

20

25

30

2000 2010 2020 2030 2040 2050 2060 2070 2080

Social Security

Medicaid

Medicare

Source: GAO analysis based on data from the Office of the Chief Actuary, Social Security Administration; Office of the Actuary, 

Centers for Medicare & Medicaid Services; and the Congressional Budget Office.

Percent of GDP

2035

 8

For additional discussion of our budget simulations, see GAO, Our Nation’s Fiscal

Outlook: The Federal Government’s Long-Term Budget Imbalance, at 

http://www.gao.gov/special.pubs/longterm/longterm.html. 

Page 8 GAO-05-564T
Figure 3: Composition of Federal Spending as a Share of GDP Assuming

Discretionary Spending Grows with GDP after 2004 and All Expiring Tax Provisions

Are Extended 

Notes: Although the revenue projections assume that expiring tax provisions are extended, federal 

revenue as a share of GDP increases through 2015 due to (1) taxpayers paying higher marginal tax 

rates as the economy grows (referred to as “real bracket creep”), (2) more taxpayers becoming 

subject to the alternative minimum tax, and (3) increased revenue from tax-deferred retirement 

accounts. After 2015, the analysis assumes that revenue as a share of GDP is held constant. For 

additional information on our budget simulations, see GAO, Our Nation’s Fiscal Outlook: The Federal 

Government’s Long-Term Budget Imbalance, at 

http://www.gao.gov/special.pubs/longterm/longterm.html. 

Beginning about 2010, the share of the population that is age 65 or older 

will begin to climb, with profound implications for our society, our 

economy, and the financial condition of these entitlement programs. In 

particular, both Social Security and the Hospital Insurance portion of 

Medicare are largely financed as pay-as-you-go systems in which current 

workers’ payroll taxes pay current retirees’ benefits. Therefore, these 

programs are directly affected by the relative size of populations of 

covered workers and beneficiaries. Historically, this relationship has been 

favorable. In the near future, however, the overall worker-to-retiree ratio 

will change in ways that threaten the financial solvency and sustainability 

of these entitlement programs. In 2000, there were 4.8 working-age

0

10

20

30

40

50

2004 2015 2030 2040

Fiscal year

Percent of GDP

Net interest

Social Security

Medicare and Medicaid

All other federal spending

Source: GAO’s March 2005 analysis.

Revenue

Page 9 GAO-05-564T
persons (20 to 64 years) per elderly person, but by 2030, this ratio is 

projected to decline to 2.9.9

 This decline in the overall worker-to-retiree 

ratio will be due to both the surge in retirees brought about by the aging 

baby boom generation as well as falling fertility rates, which translate into 

relatively fewer workers in the near future. 

Social Security’s projected cost increases are due predominantly to the 

burgeoning retiree population. Even with the increase in the Social 

Security eligibility age to 67, these entitlement costs are anticipated to 

increase dramatically in the coming decades as a larger share of the 

population becomes eligible for Social Security, and if, as expected, 

average longevity increases. 

As the baby boom generation retires and the Medicare-eligible population

swells, the imbalance between outlays and revenues will increase 

dramatically. Medicare growth rates reflect not only a rapidly increasing 

beneficiary population, but also the escalation of health care costs at rates 

well exceeding general rates of inflation. While advances in science and 

technology have greatly expanded the capabilities of medical science, 

disproportionate increases in the use of health services have been fueled 

by the lack of effective means to channel patients into consuming, and 

providers into offering, only appropriate services. In fiscal year 2004, 

Medicare spending grew by 8.5 percent and is up 9.9 percent for the first 6 

months of fiscal year 2005.10 The implementation of the Medicare 

outpatient drug benefit in January 2006 will further increase Medicare 

spending in future years.

To obtain a more complete picture of the future health care entitlement 

burden, especially as it relates to long-term care, we must also 

acknowledge and discuss the important role of Medicaid. In 2003, 

approximately 69 percent of all Medicaid dollars was dedicated to services 

for the elderly and people with disabilities. Medicaid is the second largest

and fastest growing item in overall state spending. At the February 2005 

National Governors Association meeting, governors reported that states 

 9

The specific ratios for the programs differ because of differences in the respective covered

populations. Specifically, for Social Security, the ratio of covered workers to beneficiaries

in 2005 is estimated to be 3.3. Under the 2005 Trustees’ intermediate estimates, this ratio is 

projected to decline to 2.1 by 2035. For Medicare Hospital Insurance, the ratio was 

estimated to be 3.9 for 2005 and was projected to decline to 2.3 by 2035 under the 2005 

Trustees’ intermediate estimates. 

10See CBO, Monthly Budget Review for November 4, 2004, and April 6, 2005. 

Page 10 GAO-05-564T
are faced with proposing cuts in their Medicaid programs. Over the longer 

term, the increase in the number of elderly will add considerably to the 

strain on federal and state budgets as governments struggle to finance 

increased Medicaid spending. In addition, this strain on state Medicaid 

budgets may be exacerbated by fluctuations in the business cycle. State 

revenues decline during economic downturns, while the needs of the 

disabled for assistance remain constant. 

In coming decades, the sheer number of aging baby boomers will swell the 

number of elderly with disabilities and the need for services. These 

overwhelming numbers offset the slight reductions in the prevalence of 

disability among the elderly reported in recent years. In 2000, individuals 

aged 65 or older numbered 35.1 million people—12.4 percent of our 

nation’s total population. By 2020, that percentage will increase by nearly 

one-third to 16.3 percent—one in six Americans—and will represent 

nearly 20 million more elderly than there were in 2000. By 2040, the 

number of elderly aged 85 years and older—the age group most likely to 

need long-term care services—is projected to increase more than 

250 percent from 4.3 million in 2000 to 15.4 million (see fig. 4). 

Baby Boom 

Generation Will 

Greatly Expand 

Demand for LongTerm Care

Page 11 GAO-05-564T
Figure 4: Elderly Population, 2000 through 2040 

It is difficult to precisely predict the future increase in the number of the 

elderly with disabilities, given the counterbalancing trends of an increase 

in the total number of elderly and a possible continued decrease in the 

prevalence of disability. The number of elderly with disabilities remained 

fairly constant from 1982 through 1999 while the percentage of those with 

disabilities fell between 1 and 2 percent a year from 1984 through 1999. 

Possible factors contributing to this decreased prevalence of disability 

include improved health care, improved socioeconomic status, and better 

health behaviors. The positive benefits of the decreased prevalence of 

disability, however, will be overwhelmed by the sheer numbers of aged 

baby boomers. The total number of disabled elderly is projected to 

increase, with estimates varying from an increase of one-third to twice the 

current level, or as high as 12.1 million by 2040. 

The increased number of disabled elderly will exacerbate current 

problems in the provision and financing of long-term care services. For 

example, in 2000 it was reported that approximately one in five adults with 

long-term care needs and living in the community reported an inability to 

receive needed care, such as assistance in toileting or eating, often with 

2000 2020 2040

Sources: U.S. Census Bureau, Annual Estimates of the Population by Sex and Five-Year Age Groups for the United States: 

April 1, 2000 to July 1, 2003 (NC-EST2003-01) (June 2004), and U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin

(Mar. 2004).

0

10

20

30

40

50

60

70

90

80

Number (in millions)

85 and older

65 to 84 years old

4.3

7.3

15.4

64.6

47.4

30.8

Page 12 GAO-05-564T
adverse consequences.11 In addition, disabled elderly may lack family 

support or the financial means to purchase medical services. Long-term 

care costs can be financially catastrophic for families. Services, such as 

nursing home care, are very expensive; while costs can vary widely, a year 

in a nursing home typically costs more than $50,000, and in some locations 

can be considerably more. Because of financial constraints, many elderly 

rely heavily on unpaid caregivers, usually family members and friends; 

overall, the majority of care received in the community is unpaid. 

However, in coming decades, fewer elderly may have the option of unpaid

care because a smaller proportion may have a spouse, adult child, or 

sibling to provide it. By 2020, the number of elderly who will be living 

alone with no living children or siblings is estimated to reach 1.2 million, 

almost twice the number without family support in 1990.12 In addition, 

geographic dispersion of families may further reduce the number of 

unpaid caregivers available to elderly baby boomers. 

Public and private spending on long-term care was about $183 billion for 

persons of all ages in 2003. CBO projected in 1999 that long-term care 

spending for the elderly could increase by more than two-and-a-half times 

from 2000 to 2040. A 2001 study projected that these expenditures could 

quadruple from 2000 through 2050, reaching $379 billion in 2050.13 (See fig.

5.) Estimates of future spending are imprecise, however, due to the 

uncertain effect of several important factors, including how many elderly 

will need assistance, the types of care they will use, and the availability of

public and private sources of payment for care. Absent significant changes 

in the availability of public and private payment sources, however, future 

spending is expected to continue to rely heavily on public payers, 

particularly Medicaid, which estimates indicate paid about 35 percent of 

long-term care expenditures for the elderly in 2004. 

Spending for LongTerm Care for Elderly 

Anticipated to 

Increase Sharply 

 11Judith Feder et al., “Long-Term Care in the United States: An Overview,” Health Affairs, 

May/June 2000, pp. 40-56. 

12“Aging into the 21st Century,” prepared by Jacob Siegel for the Administration on Aging,

U.S. Department of Health and Human Services, May 1996. 

13Assistant Secretary for Planning and Evaluation (ASPE) of the U.S. Department of Health 

and Human Services, who contracted with The Lewin Group, as published in Urban 

Institute, “Long-Term Care: Consumers, Providers, and Financing, A Chart Book” 

(Washington, D.C.: March 2001). 

Page 13 GAO-05-564T
Figure 5: Long-Term Care Expenditures for the Elderly, 2000 through 2050 

a

CBO did not separately report spending by Medicaid or any other financing source as a portion of the 

total estimated long-term care expenditures for the elderly for years later than 2020. 

b

ASPE/Lewin did not report separate estimates for different assumptions about the role of private 

insurance. 

c

Projections are in constant dollars. 

One factor that will affect spending is how many elderly will need 

assistance. As noted earlier, even with continued decreases in the 

prevalence of disability, aging baby boomers are expected to have a 

disproportionate effect on the demand for long-term care. Another factor 

influencing projected long-term care spending is the type of care that the 

baby boom generation will use. Per capita expenditures for nursing home 

care greatly exceed those for care provided in other settings. Since the

1990s, there have been increases in the use of paid home care as well as in 

assisted living facilities, a relatively newer and developing type of housing. 

2000 2020 2040 2000

Non-Medicaid spending, assuming

more private insurance 

Non-Medicaid spending, assuming

same level of private insurance 

Non-Medicaid spending

Medicaid spending 

Medicaid spending

0

50

100

150

200

250

300

350

400

CBO projectionsa ASPE/Lewin projectionsb

Total spending, assuming more private insurance 

Total spending, assuming same level of private insurance 

Sources: CBO, “Projections of Expenditures for Long-Term Care Services for the Elderly” (Washington, D.C.: March 1999) and 

ASPE/Lewin, published in Urban Institute, “Long-Term Care: Consumers, Providers, and Financing, A Chart Book” 

(Washington, D.C.: March 2001), with additional information provided by ASPE on projected Medicaid spending. 

2025 2050

Dollars (in billions)c

Page 14 GAO-05-564T
It is unclear what effect continued growth in paid home care, assisted 

living facilities, or other care alternatives may have on future 

expenditures. Any increase in the availability of home care may reduce the 

average cost per disabled person, but the effect could be offset if there is 

an increase in the use of paid home care by persons currently not 

receiving these services.

Changes in the availability of public and private sources to pay for care

will also affect expenditures. Private long-term care insurance has been 

viewed as a possible means of reducing catastrophic financial risk for the 

elderly needing long-term care and relieving some of the financial burden

currently falling on public long-term care programs. Increases in private 

insurance may lower public expenditures but raise spending overall 

because insurance increases individuals’ financial resources when they 

become disabled and allows the purchase of additional services. The 

number of policies in force remains relatively small despite improvements

in policy offerings and the tax deductibility of premiums. However, as we 

have previously testified, questions about the affordability of long-term 

care policies and the value of the coverage relative to the premiums 

charged have posed barriers to more widespread purchase of these 

policies.14 Further, many baby boomers continue to assume they will never 

need such coverage or mistakenly believe that Medicare or their own 

private health insurance will provide comprehensive coverage for the 

services they need. If private long-term care insurance is expected to play 

a larger role in financing future generations’ long-term care needs, 

consumers need to be better informed about the costs of long-term care, 

the likelihood that they may need these services, and the limits of 

coverage through public programs and private health insurance. 

With or without increases in the availability of private insurance, Medicaid 

and Medicare are expected to continue to pay for the majority of long-term 

care services for the elderly in the future. Without fundamental financing 

changes, Medicaid can be expected to remain one of the largest funding 

sources for long-term care services for aging baby boomers, with Medicaid 

expenditures for long-term care for the elderly reaching as high as 

$132 billion by 2050. As noted earlier, this increasing burden will strain 

both federal and state governments. 

 14GAO, Long-Term Care: Baby Boom Generation Increases Challenge of Financing 

Needed Services, GAO-01-563T (Washington, D.C.: Mar. 27, 2001) and Long-Term Care

Insurance: Better Information Critical to Prospective Purchasers, GAO/T-HEHS-00-196 

(Washington, D.C.: Sept. 13, 2000). 

Page 15 GAO-05-564T
Considerations for 

Reforming Long-Term 

Care Financing 

Given the anticipated increase in demand for long-term care services 

resulting from the aging of the baby boom generation, the concerns about 

the availability of services, and the expected further stress on federal and 

state budgets and individuals’ financial resources, some policymakers and 

advocates have called for long-term care financing reforms. Indeed, we 

identified options for rethinking the federal, state, and private insurance 

roles in financing long-term care as one of the key questions that our 

nation needs to face as it addresses 21st century challenges.15 The 

Comptroller General previously testified in 2002 on several considerations 

for policymakers to keep in mind when considering reforms for long-term 

care financing, and these considerations remain relevant today. 

At the outset, it is important to recognize that long-term care services are 

not just another set of traditional health care services. Meeting acute and 

chronic health care needs is an important element of caring for aging and

disabled individuals. Long-term care, however, encompasses services 

related to maintaining quality of life, preserving individual dignity, and 

satisfying preferences in lifestyle for someone with a disability severe 

enough to require the assistance of others in everyday activities. Some 

long-term care services are akin to other health care services, such as 

personal assistance with activities of daily living or monitoring or 

supervision to cope with the effect of dementia. Other aspects of long-term 

care, such as housing, nutrition, and transportation are services that all of

us consume daily but become an integral part of long-term care for a 

person with a disability. Disabilities can affect housing needs, nutritional 

needs, or transportation needs. But, what is more important is that where 

one wants to live or what activities one wants to pursue also affects how 

needed services can be provided. Providing personal assistance in a 

congregate setting such as a nursing home or assisted living facility may 

satisfy more of an individual’s needs, be more efficient, and involve more

direct supervision to ensure better quality than when caregivers travel to

individuals’ homes to serve them one on one. Yet, those options may 

conflict with a person’s preference to live at home and maintain autonomy 

in determining his or her daily activities. 

Keeping in mind that policies need to take account of the differences 

involved in long-term care, there are several issues that policymakers may 

wish to consider as they address long-term care financing reforms. These 

include: 

 15GAO, 21st Century Challenges: Reexamining the Base of the Federal Government. 

Page 16 GAO-05-564T
• Determining societal responsibilities. A fundamental question is how 

much the choices of how long-term care needs are met should depend 

upon an individual’s own resources or whether society should supplement 

those resources to broaden the range of choices. For a person without a 

disability requiring long-term care, where to live and what activities to 

pursue are lifestyle choices based on individual preferences and 

resources. However, for someone with a disability, those lifestyle choices 

affect the costs of long-term care services. The individual’s own 

resources—including financial resources and the availability of family or 

other informal supports—may not be sufficient to preserve some of their 

choices and also obtain needed long-term care services. 

Societal responsibilities may include maintaining a safety net to meet 

individual needs for assistance. However, the safety net may not provide a 

full range of choices in how those needs are met. Persons who require 

assistance multiple times a day and lack family members to provide some 

share of this assistance may not be able to have their needs met in their 

own homes. The costs of meeting such extensive needs may mean that 

sufficient public support is available only in settings such as assisted living 

facilities or nursing homes. More extensive public support may be 

extended, but decisions to do so should carefully consider affordability in 

the context of competing demands for our nation’s resources. 

• Considering the potential role of social insurance in financing. 

Government’s role in many situations has extended beyond providing a 

safety net. Sometimes this extended government role has been a result of 

efficiencies in having government undertake a function, or in other cases 

this role has been a policy choice. Some proposals have recommended 

either voluntary or mandatory social insurance to provide long-term care

assistance to broad groups of beneficiaries. In evaluating such proposals, 

careful attention needs to be paid to the limitations and conditions under 

which services will be provided. In addition, who will be eligible and how

such a program will be financed are critical choices. As in establishing a 

safety net, it is imperative that any option under consideration be 

thoroughly assessed for its affordability over the longer term. 

• Encouraging personal preparedness. Becoming disabled is a risk. Not 

everyone will experience disability during his or her lifetime and even 

fewer persons will experience a severe disability requiring extensive 

assistance. This is the classic situation in which having insurance to 

provide additional resources to deal with a possible disability may be 

better than relying on personally saving for an event that may never occur.

Insurance allows both persons who eventually will become disabled and 

those who will not to use more of their economic resources during their 

Page 17 GAO-05-564T
lifetime and to avoid having to put those resources aside for the possibility 

that they may become disabled. 

The public sector has at least two important potential roles in encouraging

personal preparedness. One is to adequately educate people about the 

current divisions between personal and societal responsibilities. Only if 

the limits of public support are clear will individuals be likely to take steps 

to prepare for a possible disability. Currently, one of the factors 

contributing to the lack of preparation for long-term care among the 

elderly is a widespread misunderstanding about what services Medicare 

will cover. Another public sector role may be to assure the availability of

sound private long-term care insurance policies and possibly to create 

incentives for their purchase. Progress has been made in improving the 

value of insurance policies through state insurance regulation and through 

strengthening the requirements for policies qualifying for favorable tax 

treatment enacted by the Health Insurance Portability and Accountability 

Act of 1996.16 Furthermore, since 2002 the federal government has offered 

long-term care insurance to federal employees, military personnel, 

retirees, and their families, providing the largest offering of long-term care 

insurance. While the federal government’s program is still very new, other 

employers and policymakers will likely be carefully watching the federal

government’s experience in offering long-term care insurance. Long-term 

care insurance remains an evolving product, and given the flux in how 

long-term care services are delivered, it is important to monitor whether 

long-term care insurance regulations need adjustments to ensure that 

consumers receive fair value for their premium dollars. 

• Recognizing the benefits, burdens, and costs of informal caregiving. 

Family and other informal caregivers play a critical role in supplying the

bulk of long-term care to disabled persons. Effective policy must create 

incentives and supports for enabling informal caregivers to continue 

providing assistance. Further, care should be taken to avoid creating 

incentives that result in informal care being inappropriately supplanted by

formal paid services. At the same time, it is important to recognize the 

physical, emotional, and social burdens that providing care impose on the 

caregiver and its economic costs to the caregiver and to society. 

Caregiving may create needs in caregivers themselves that require respite 

or other relief services. In addition, caregiving can conflict with caregivers’ 

employment, creating economic losses for caregivers and society. Such 

 16Pub. L. No. 104-191, §§ 321-327, 110 Stat. 1936, 2054-2067. 

Page 18 GAO-05-564T
losses in productivity will become even more important in the coming 

decades as the proportion of the population that is working-age declines.

• Assessing the balance of federal and state responsibilities to 

ensure adequate and equitable satisfaction of needs. Reforms in 

long-term care financing may require reevaluating the traditional federal

and state financing roles to better ensure an equitable distribution of 

public support for individuals with disabilities. The variation across states 

in Medicaid spending per capita on long-term care is in part reflective of 

differences among states in generosity of services as well as their fiscal 

capacity. Given these differences, having states assume primary 

responsibility for financing long-term care subjects individuals to different 

levels of support depending on where they live. In addition, because state

revenues are sensitive to the business cycle and states generally must have 

balanced budgets, their services become vulnerable during economic 

downturns. 

• Adopting effective and efficient implementation and 

administration of reforms. Proposed reforms to better meet the 

increasing demand for long-term care within budget constraints will be 

successful only if they are administratively feasible, effectively reach 

targeted populations and unmet needs, and efficiently provide needed 

services at minimum cost while complementing already available services

and financing sources. 

• Developing financially sustainable public commitments. Finally, as 

noted earlier, absent reform, existing federal entitlement commitments for 

Medicaid, Medicare, and Social Security will represent an increasing and 

potentially unsustainable share of the economy. States, too, are concerned

about their budgetary commitments for long-term care through their share 

of the Medicaid program. Before committing to any additional public role 

in financing long-term care, it is imperative to provide reasonable 

assurance that revenues will be available to fund its future costs. 

Mr. Chairman, this completes my prepared statement. I would be happy to

respond to any questions you or other members of the subcommittee may 

have at this time. 

Page 19 GAO-05-564T
For future contacts regarding this testimony, please call Kathryn G. Allen 

at (202) 512-7118. Other individuals who made key contributions include 

John Dicken, Linda F. Baker, Laura Sutton Elsberg, James R. McTigue, and 

Joseph Petko. 

Page 20 GAO-05-564T

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