For Release on Delivery

Expected at 10:00 a.m.

Tuesday, March 27, 2001

GAO-01-563T

LONG-TERM CARE

Baby Boom Generation

Increases Challenge of

Financing Needed Services

Statement of William J. Scanlon

Director, Health Care Issues

Testimony

Before the Committee on Finance, U.S. Senate

United States General Accounting Office

GAO
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Chairman Grassley, Ranking Member Baucus, and Members of the

Committee:

I am pleased to be here today as you discuss the challenges we as a society

face in financing long-term care needs. These challenges are formidable

already, as an estimated 9 million persons age 18 or older receive longterm care assistance, either at home or in institutions such as nursing

homes. While family members provide much care, paying for purchased

services presents a significant financial burden for many individuals and

for public health care programs. For those needing nursing home or other

extensive continuous care, the costs can be substantial. On average,

nursing home care currently costs $55,000 annually, with many nursing

home residents paying much of that out of their own pockets.

Providing and financing long-term care will become even more challenging

in just over a decade when the 76 million baby boomers begin to turn 65.

Over the next 30 years, the number of elderly individuals is expected to

double. Moreover, with baby boomers expected to live longer and greater

numbers reaching age 85 and older, this generation is expected to have a

dramatic effect on the number of people needing long-term care services,

as the prevalence of disabilities and dependencies increases with age. To

help alleviate the pressures on public programs and families in meeting the

needs of these persons, some advocate a growing role for private longterm care insurance. Several recent congressional initiatives aim to

increase the use of private insurance in financing long-term care needs.

These initiatives include establishing a program to make group long-term

care insurance available to federal employees, members of the uniformed

services, and civilian and military retirees; and proposals to provide

additional tax subsidies to individuals purchasing long-term care

insurance.

In view of these issues, you asked us to provide the Committee

information on long-term care insurance to assist you in considering what

role it may play in meeting future long-term care needs. Accordingly, my

remarks today, which are based on our previous work and other published

and ongoing research,1 focus on (1) the increased demand an aging baby

boom generation will likely create for long-term care; (2) an overview of

current spending for long-term care, including recent changes in Medicaid

and Medicare financing of long-term care; and (3) the potential role of

private long-term care insurance in helping finance this care, including

 1A list of related GAO products follows this statement.

Long-Term Care: Baby Boom Generation

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who is likely to buy this insurance, its affordability, and the critical need

for consumer protections.

While my focus will be on financing the projected increase in the need for

long-term care for the elderly, long-term care needs of younger persons

should not be overlooked. Disability and dependency have no age

boundaries, and the long-term care needs of the nonelderly and the burden

of satisfying them can be profound. How to better meet these needs and

distribute the burden deserves our attention. However, the potential for

private long-term care insurance to assist those whose disabilities or

dependencies begin at younger ages may be very limited.

In summary, the confluence of the aging baby boom generation, longer life

expectancies, and evolving options for providing and financing long-term

care services will require substantial public and private investment in longterm care and the development of sufficient capacity to serve this growing

population. Spending for long-term care, including post-acute and chronic

care in nursing homes and home and community-base care, was about

$134 billion in 1999. Medicaid and Medicare paid for nearly 58 percent of

these services in 1999, contributing about $59 billion and $18 billion,

respectively. Medicaid funds primarily go to nursing homes and other

institutional settings of long-term care, but home and community-based

services receive a growing share. Medicare primarily covers acute-care

services and thus plays a lesser role in financing nursing home care—by

paying only for short-term stays following a hospitalization. While the

Medicare home health benefit had grown to play a significant role in

covering long-term care, the new BBA-mandated payment system may

reduce the provision of such services. Medicaid, which is a jointly funded

federal-state program, poses a large burden on states’ budgets, creating

pressure on their capacity to absorb additional costs associated with the

growing need for long-term care services over the coming decades.

Private long-term care insurance is viewed as a possible way to reduce

catastrophic financial risk for the elderly needing long-term care and to

relieve some of the financing burden now shouldered by public long-term

care programs. Yet private insurance, including both traditional health

insurance and long-term care insurance, represents only about 10 percent

of long-term care spending—about $14 billion in 1999. Less than 10

percent of the elderly and an even lower percentage of the near-elderly

have bought long-term care insurance, although the number of individuals

purchasing long-term care insurance increased during the 1990s.

Questions remain about the affordability of policies and the value of the

coverage relative to the premiums charged, and while many states have

adopted standards for long-term care policies, it is uncertain whether
Long-Term Care: Baby Boom Generation

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these fully assure consumer confidence in the reliability of long-term care

insurance. If long-term care insurance is to have a more significant role in

addressing the baby boom generation’s upcoming chronic health care

needs, the policies offered must be viewed by consumers as reliable,

affordable products with benefits and limitations that are easy to

understand.

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

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

have difficulty performing some activities of daily living (ADL) without

assistance, such as bathing, dressing, toileting, eating, and moving from

one location to another. They may have mental impairments, such as

Alzheimer’s disease, that necessitate supervision to avoid harm to

themselves or others or require assistance with tasks such as taking

medications. Although a chronic physical or mental disability may occur

at any age, the older an individual becomes, the more likely a disabling

condition will develop or worsen. Nearly one-seventh of the nation’s

current elderly population—an estimated 5.2 million—have a limitation in

either ADLs; instrumental activities of daily living (IADL) such as

preparing food, doing housekeeping, and handling finances; or both. More

than one-third of these people have limitations in two or more ADLs.

Long-term care encompasses a wide array of care settings and services,

not only institutional care provided by nursing homes for individuals with

more extensive care needs but also home and community-based care.

Nearly 80 percent of the elderly requiring assistance with ADLs or IADLs

live at home or in community-based settings, while more than 20 percent

live in nursing homes or other institutions. The majority of long-term care

is provided by unpaid family caregivers to elderly individuals living either

in their own homes or with their families. However, a growing minority of

the elderly receives paid assistance from various sources. For example,

state Medicaid programs have increased significantly the number of

beneficiaries receiving in-home or community services. In addition,

alternatives to nursing home care, such as assisted-living arrangements,

are developing that have long-term care services available.

Long-term care needs are an especially significant concern for women.

Women represent 7 of 10 unpaid caregivers, three-quarters of nursing

home residents 65 years and older, and two-thirds of home health care

users. Given their longer life expectancies and the fact that married

women usually outlive their spouses, many women face a greater risk of

needing long-term care by a paid caregiver.

Background
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The baby boom generation, about 76 million people born between 1946

and 1964, will contribute significantly to the growth in the number of

elderly individuals who need long-term care and in the amount of

resources required to pay for it. The oldest baby boomers are now in their

fifties. In 2011, the first of the baby boomers born in 1946 will turn 65 years

old and become eligible for Medicare. The Medicaid program, which pays

for many health care services for low-income elderly, including nursing

home care, will also begin to be affected. Baby boomers are likely to have

a disproportionate effect on the demand for long-term care because more

are expected to live to advanced ages, when need is most prevalent. The

first baby boomers reach age 85 in 2030.

In 2000, individuals aged 65 or older made up 12.7 percent of our nation’s

total population. By 2020, that percentage will increase by nearly onethird to 16.5 percent--one in six Americans--and will represent nearly 20

million more seniors than there are today. By 2040, the number of seniors

aged 85 years and older will more than triple to 14 million (see fig. 1).

The Baby Boom

Generation Will

Greatly Expand

Demand for LongTerm Care
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Figure 1: Estimated Number of Elderly Individuals in 2000, 2020, and 2040

0

10

20

30

40

50

60

70

80

90

2000 2020 2040

85+

65 to 84

4.3

14.3

62.9

30.5

6.8

47.0

In Millions

Source: Bureau of the Census, “Projections of the Total Resident Population by 5-Year

Age Groups and Sex With Special Age Categories: Middle Series,” selected years 2000 to

2040 (Jan. 2000).

Projecting the number of baby boomers who will need long-term care

services is complicated by several factors. While experts agree that the

growing elderly population will increase the number of disabled elderly

needing long-term care over the next several decades, no consensus exists

on the size of that increase. Projections of the number of disabled elderly

who will need care range between 2 and 4 times the current number.

Researchers also disagree about the effects of better health care and

healthier lifestyles on the baby boomers’ need for long-term care. Some

contend that medical advances have increased life expectancy but have

not changed the age of onset of illness and that therefore the need for
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long-term care may have increased. Others contend that better treatment

and prevention could decrease the time period at the end of life when

long-term care is needed.

Baby boomers may also have a disproportionate effect on the demand for

paid services. Many baby boomers will have fewer options besides paid

long-term care providers because a smaller proportion of this generation

may have a spouse or adult children to provide unpaid caregiving. This

likelihood stems from the geographic dispersion of families and the large

percentage of women who work outside the home, which may reduce the

number of unpaid caregivers available to elderly baby boomers.

In 1999, spending for nursing home and home health care was about $134

billion. Individuals needing care and their families paid for almost 25

percent of these expenditures out-of-pocket, public programs

(predominantly Medicaid and Medicare) funded 61 percent, private

insurance (including long-term care insurance as well as services paid by

traditional health insurance) accounted for about 10 percent, and other

private sources paid the remaining 5 percent (see fig. 2). These amounts,

however, do not include the many hidden costs of long-term care. For

example, they do not include wages lost when an unpaid family caregiver

takes time off from work to provide assistance. An estimated 60 percent

of the disabled elderly living in communities rely exclusively on their

families and other unpaid sources for their care.

Public Programs and

Out-of-Pocket

Spending

Predominantly

Finance Long-Term

Care Services
Long-Term Care: Baby Boom Generation

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Figure 2: Percentage of Expenditures for Nursing Home and Home Health

are, by Source of Payment, 1999

Note: Also includes Medicaid expenditures for home and community-based services,

which are considered as part of “other personal health care” in the Health Care Financing

Administration’s (HCFA) national health care accounts.

Source: Department of Health and Human Services, HCFA, Office of the Actuary, National

Health Statistics Group, Personal Health Care Expenditures, 2001.

Other public

Other private

Private insurance

Medicare

Out-of-pocket

Medicaid

2.9%

4.6%

10.3%

13.7%

24.6%

43.8%
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Medicaid, a joint federal-state health financing program for low-income

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

care. Within broad federal guidelines, states design and administer

Medicaid programs that include coverage for certain mandatory services,

such as skilled nursing facility care, and other optional coverage, including

home and community-based services. Long-term care services under

Medicaid are not limited to adults—about 1 million children with special

needs also receive long-term care services from Medicaid. Although most

Medicaid long-term care expenditures are for nursing home care, in the

last two decades the proportion of expenditures for home and communitybased care has increased. By fiscal year 1998, the number of Medicaid

recipients receiving home health or home and community-based services

was similar to the number of Medicaid recipients receiving nursing facility

services. How much service Medicaid provides varies among states, and

Medicaid financing can be vulnerable to shifts in state revenues.

State Medicaid programs have, by default, become the major form of

insurance for long-term care. About two-thirds of nursing home residents

in 1998 relied on Medicaid to help pay for their care, but Medicaid

provides insurance only after individuals have become nearly

impoverished by “spending down” their assets. Medicaid eligibility for

many elderly persons results from having become poor as the result of

depleting assets to pay for nursing home care, which costs an average of

$55,000 per year.2

 In most states, nursing home residents without a spouse

must have less than $2,000 in countable assets to become eligible for

Medicaid coverage. An overall increase in wealth among the elderly

means that a smaller proportion of elderly individuals will initially qualify

for Medicaid—and others will need to become impoverished before they

qualify.

States historically limited coverage of in-home services under Medicaid

because of concern about the potential cost of covering services for the

large number of disabled who were being cared for by their families.

However, as part of the Omnibus Budget Reconciliation Act of 1981, the

Congress established the home and community-based service waiver

program. The waiver program gave states the option of applying for

Medicaid waivers to fund home and community-based services for people,

including the nonelderly, who met Medicaid eligibility requirements for

nursing home care. These waivers also allowed states to restrict the

 2MetLife Mature Market Institute survey, 2000. This survey also found that nursing home costs vary

widely by geographic region, from nearly $33,000 per year in Hibbing, Minnesota, to more than

$100,000 per year in the Borough of Manhattan in New York City.

Medicaid
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number and costs of eligible individuals served under Medicaid in home

and community-based settings. All states now have home and communitybased waivers, and more than 200 waiver programs served more than

450,000 individuals nationwide in fiscal year 1998. Medicaid expenditures

for home and community-based waivers increased an average of 29

percent per year from 1988 to 1999, reaching over $10 billion in 1999. The

extent of services provided varies considerably among the states.

Medicaid per capita expenditures for home care in 1999 ranged from a low

of about $8 in Mississippi to a high of nearly $230 in New York.3

Medicaid is a significant share of state budgets—comprising 20

percent on average. Dependence on state budgets makes Medicaid

financing vulnerable to states’ fiscal health. States generally must

maintain balanced budgets without deficits, and their revenues often

decline in periods of low or negative economic growth. A recent

fiscal survey of states showed that about one-half of states are

expecting declines in revenue growth for 2001 to 2002, and a few

states are reducing current-year appropriations and making other

adjustments to maintain balanced budgets.4 At the same time, onehalf of the states estimate that Medicaid spending will exceed their

current projections. With declining revenue and increasing

Medicaid expenditures, maintaining balanced budgets in states may

require constraining Medicaid expenditures, including the large

share represented by long-term care services.

While Medicare primarily covers acute care, in the early 1990s it also

became a de facto payer for some long-term care services.5 However, as

spending for both skilled nursing facility services and home health care

became the fastest growing components of Medicare, the Congress in the

Balanced Budget Act of 1997 (BBA) introduced new payment systems for

nursing facilities and home health providers to control this spending.

In contrast to Medicaid, which paid nearly half of total nursing home and

other institutional care expenditures in 2000, Medicare plays a relatively

small role, paying only about 12 percent of total nursing home and other

institutional care expenditures. Medicare primarily covers acute-health-

 3The range excludes Arizona, which is unique in having a capitated long-term care system.

4National Association of State Budget Officers, National Governor’s Association, The Fiscal Survey of

States: December 2000 (Washington, D.C.).

5Medicare predominantly covers the elderly, but more than 5 million of the 39 million Medicare

beneficiaries are nonelderly disabled individuals eligible for Medicare because they have received

Social Security or Railroad Retirement Board disability benefits for at least 2 years.

Medicare
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care costs and therefore limits its nursing home coverage to short-term,

post-acute stays of up to 100 days per spell of illness following

hospitalization. Medicare nursing home spending increased from $1.7

billion in 1990 to $10.4 billion in 1998 and declined to $9.6 billion in 1999.

Since 1989, Medicare became a significant funding source of home care,

financing $8.7 billion in care in 1999—or more than one-fourth of the home

care purchased for the elderly. Court decisions and legislative changes in

coverage essentially transformed the Medicare home health benefit from

one focused on patients needing acute, short-term care after

hospitalization to one that primarily served chronic, long-term care

patients. By 1994, only about one-fourth of home health visits covered by

Medicare occurred within 60 days following a hospitalization. As a result,

Medicare, on a de facto basis, financed an increasing amount of long-term

care through its home health care benefit. Both the number of

beneficiaries receiving home health care and the number of visits per user

more than doubled from 1989 to 1996. From 1990 to 1997, the average

annual growth rate for Medicare home health care spending was 25.2

percent—more than 3 times the growth rate for Medicare spending as a

whole. This increase in the use of these services cannot be explained by

any increase in the incidence of illness among Medicare beneficiaries.

In response to concerns about the growth in spending for Medicare

services, including skilled nursing facility and home health services, the

BBA included provisions to slow Medicare spending growth. The BBA

required prospective payment systems (PPS) to be implemented for

Medicare services provided through home health care agencies and skilled

nursing facilities, replacing retrospective, cost-based reimbursement

systems that did not provide adequate incentives to control costs. The

skilled nursing facility PPS began to be implemented in July 1998 and will

be completely phased in this year.

For home health, rather than immediately introducing a PPS, an interim

home health care payment system was implemented in October 1997,

pending development of a case-mix adjusted prospective payment system.

Between 1997 and 1998, Medicare home health spending fell by nearly 15

percent, while home health visits dropped sharply by 40 percent, and this

decline continued in 1999.6

 The new home health PPS, implemented in

October 2000, is expected to be a more appropriate payment tool than the

interim payment system because it is designed to more closely align

 6See Medicare Home Health Care: Prospective Payment System Could Reverse Recent Declines in

Spending (GAO/HEHS-00-176, Sept. 8, 2000).
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payments with patient needs.7 PPS rates are based on a higher number of

home health visits per user than those currently being provided. As a

result, the PPS can support a large expansion of services. However, PPS

incentives are intended to reward efficiency and control use of services.

Because criteria for what constitutes appropriate home health care do not

exist, it may be difficult for Medicare to ensure that patients receive all

necessary services. How home health agencies respond to the PPS and its

incentives could have major implications for the amount of future

Medicare funding for home health care, the services provided, and

whether Medicare remains a significant payer of long-term care.

Many baby boomers will have more financial resources in retirement than

their parents and may therefore be better able to absorb some long-term

care costs. However, long-term care will represent a catastrophic cost for

a relatively small portion of families. Private insurance can provide

protection for such catastrophes because it spreads the risk among larger

numbers of persons. Private long-term care insurance has been viewed as

a means of both reducing potential catastrophic financial losses for the

elderly and relieving some of the financing burden now shouldered by

public long-term care programs. Some observers also believe private longterm care insurance could give individuals a greater choice of services to

satisfy their long-term care needs. However, less than 10 percent of

elderly individuals and even fewer near-elderly individuals (those aged 55

to 64) have purchased long-term care insurance. The National Association

of Insurance Commissioners’ (NAIC) most recent data show that

approximately 4.1 million persons were insured through long-term care

policies in 1998, compared with 1.7 million persons in 1992.8

 In contrast,

about two-thirds of the elderly—about 23 million individuals—have

private Medicare supplemental (Medigap) insurance policies for nonMedicare-covered expenses such as copayments, deductibles, and

prescription drugs.

Barriers to purchasing long-term care policies still exist, including

misunderstandings among consumers about the roles of public programs,

personal resources, and private insurance in financing long-term care.

Private long-term care insurance is still a little known product, but

insurance providers are seeking to build a larger market. Many baby

 7See Medicare: Refinements Should Continue to Improve Appropriateness of Provider Payments

(GAO/T-HEHS-00-160, July 19, 2000).

8The accuracy of these policy numbers is dependent upon the accuracy of the information filed by the

insurers themselves with the NAIC.

Private Long-Term

Care Insurance Is

Small but Growing 
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boomers continue to believe they will never need such coverage. A recent

survey of the elderly and near elderly found that only about 40 percent

believed that they or their families would be responsible for paying for

their long-term care. Some mistakenly believed that public programs,

including Medicaid and Medicare, or their own health care insurance

would provide comprehensive coverage for the services they need. This

low perceived need for protection decreases demand for long-term care

insurance. People also may be concerned about whether they can afford

such insurance now or in the future when their premiums may increase

and their retirement incomes may have decreased.

Some employers offer employees a voluntary group policy option for longterm care insurance, but this market remains small and includes

predominantly large employers. Usually employers do not pay for any of

the costs of these policies, but group policies have lower administrative

costs than individually purchased policies, which can result in lower

premiums. One study estimated that 6 to 9 percent of eligible employees

took advantage of employer-provided group long-term care insurance

where it was available.9 Last year, the Congress passed legislation to offer

unsubsidized, optional group long-term care insurance to federal

employees and retirees beginning by fiscal year 2003. This initiative will

likely establish the largest group offering of long-term care insurance and

could significantly expand this market.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA)

extended tax deductibility of some premiums and tax exemptions for

certain benefits to qualified long-term care insurance policies that must

satisfy certain consumer protection standards and other requirements.10

The consumer protection standards are deemed satisfied if a policy

complies with NAIC’s Long-Term Care Model Act and Regulation as of

1993. As of July 1998, the Health Insurance Association of America (HIAA)

reported that all 50 states (which have primary responsibility for

regulating insurance policies) required policies to adhere to at least three

 9Steven Lutzky and others, Preliminary Data From a Survey of Employers Offering Group Long-Term

Care Insurance to Their Employees: Interim Report( June 1999).

10A qualified long-term care insurance plan is defined as a contract that covers only long-term care

services; does not pay for services covered under Medicare; is guaranteed to be renewable; does not

provide for a cash surrender value or other money that can be paid, assigned, 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. Also, payments received from a qualified plan are considered medical expenses

and are excluded from gross income for determining income taxes. Per diem policies that pay on the

basis of disability rather than reimbursing for services used are subject to a cap of $180 per day per

person in 1998. Out-of-pocket expenses for long-term care are allowed as itemized deductions along

with other medical expenses if they exceed 7.5 percent of adjusted gross income.
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of these NAIC long-term care insurance standards. These three standards

require policies to (1) not make prior hospitalization a condition for

coverage, (2) have an outline of the coverage the policy provides, and (3)

be guaranteed to be renewable and noncancelable except for nonpayment

of premiums. In addition, all but one state adheres to the NAIC definition

of long-term care insurance (policies that provide coverage for at least 12

months for necessary services provided in settings other than acute-care

hospital units), and all but two states adhere to the preexisting conditions

standard. Overall, HIAA identified 14 NAIC provisions specified for longterm care policies to be tax-qualified under HIPAA that had been adopted

by at least 35 states as of July 1998.

Many elderly and near-elderly individuals question the affordability and

the value of long-term care insurance relative to the premiums charged.

Long-term care insurance costs vary depending on the policyholder’s age

at the time of purchase, optional benefits and terms selected, and the

insurer. Premiums for a 65-year-old are typically about $1,000 per year

and can be much higher for more generous coverage or for older buyers.

The affordability of long-term care insurance determines to a great extent

its market and is a key factor in individuals’ decisions to purchase and

retain a long-term care insurance policy. Although assessing whether

individuals can afford a policy is subjective, some studies estimate that

long-term care insurance is affordable for only 10 to 20 percent of the

elderly. Affordability is even more of an issue for married couples, who

must each purchase individual coverage. While some insurers offer

discounts to married couples when both purchase long-term care

coverage, elderly couples are still likely to pay at least several thousand

dollars annually for long-term care coverage. Those who consider and

decide against purchasing long-term care insurance say they are skeptical

about whether private policies will give adequate coverage. Those who do

find long-term care insurance affordable when purchased may later decide

it is not if their financial circumstances change or the premiums increase.

An industry group estimates that 55 to 65 percent of all long-term care

insurance policies sold as of June 1998 remain in force.

Insurers state that it is prudent to buy long-term care insurance earlier

rather than later in life because premiums are based largely on an

individual’s age when the policy is purchased. A policy purchased when a

person is in his or her 40s or 50s has much lower premiums than a policy

purchased later; however, the younger person pays the premiums over a

longer period. If a person waits until age 79 to buy, the premiums are

typically about 2-1/2 times higher than if the same policy had been

Affordability of Long-Term

Care Insurance Concerns

Many Elderly Individuals
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purchased when he or she was 65, and about 6 to 10 times higher than if

the policy had been purchased at age 50.

Unfamiliarity with the concept and uncertainty of the value of long-term

care insurance may deter some people from purchasing a policy. A

relatively low premium at age 45 may nonetheless seem high for a risk that

may not be realized for 40 years. Concerns about the cost of premiums

relative to the value of policies may be a factor deterring purchases,

especially when premiums for a similar policy for the same individual can

vary widely. For example, a 65-year-old in Wisconsin can pay $857 to

$2,061 per year for a long-term care insurance policy depending on the

carrier, even if the terms are similar.11

Consumers deserve complete and accurate information about any

insurance product that they purchase, and sales of long-term care policies

are not likely to increase significantly unless consumers are given

adequate and understandable information to assess them. If long-term

care insurance is to help address the baby boom generation’s future longterm care needs, individuals must understand what they are buying and

what future changes, if any, they may face in their policy’s coverage or

premiums. While NAIC’s model standards have helped address prior

deficiencies in the terms of long-term care policies,12

 it is uncertain

whether these have been sufficient to assure consumers that long-term

care products are reliable and the terms of the products are easily

understood and will be fulfilled. Recently, NAIC further amended its

models in response to concerns about dramatic premium increases that

some long-term care policyholders experienced.

In August 2000, NAIC amended its Long-Term Care Insurance Model Act

and Regulation to strengthen consumer disclosure and encourage insurers

to set initial rates at levels unlikely to require further increases. In part,

this was intended to address problems such as those highlighted by a

recently settled class action lawsuit involving long-term care policyholders

in North Dakota who had dramatic premium increases—some by more

 11Annual premiums for individual basic long-term care insurance policies marketed in Wisconsin as of

October 1999, with a $100 per-day nursing home benefit, $50 per-day home health benefit, lifetime

benefits, a 90- or 100-day elimination period, and no optional benefits.

12In 1993, we reported on a number of problems in the long-term care insurance market, including

those related to disclosure standards, inflation protection options, clear and uniform definitions of

services, eligibility criteria, grievance procedures, nonforfeiture of benefits, options for upgrading

coverage, and sales commission structures that potentially created incentives for marketing abuses.

See Health Care Reform: Supplemental and Long-Term Care Insurance (GAO/T-HRD-94-58, Nov. 9,

1993).

Consumer Protection Vital,

Especially If Private

Insurance Plays a Larger

Role in Financing LongTerm Care
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than 700 percent—even though they believed that their premiums would

not increase as long as they held their policies. In states that adopt the

new NAIC model amendments, insurers will have to provide written

information to prospective purchasers explaining

• that a policy’s premium may increase in the future,

• why premium increases may occur,

• what options a policyholder has in the event of an increase, and

• the 10-year rate history for their policies.

In states that adopt the model, consumers will also have to specifically

acknowledge that they understand their policy’s premiums may increase,

and insurers must explain any contingent benefit available to

policyholders who let their policies lapse because of a substantial rate

increase. Additionally, NAIC adopted amendments to better ensure that

long-term care insurers price their policy premiums to be sufficient over

the lifetime of the policy, so as to minimize the need for future premium

increases. As a further consumer protection, these amendments require

insurers to reimburse policyholders when any rate increase is found to be

unnecessary and allow state insurance commissioners to ban an insurer

from the long-term care market if the insurer has a pattern of offering

initial policy purchasers inadequate premium rates. For the new NAIC

model provisions to become effective, states must choose to adopt them

as part of their statutes or regulations. An NAIC official reported that some

states have begun considering legislation or regulations reflecting the

revised NAIC models but that states will vary in whether and how quickly

they adopt particular portions.

The aging of the baby boomers will greatly increase the nation’s elderly

population in the next 3 decades and thus increase the population who

need long-term care services. The need for these services will become

more critical after 2030, when this population reaches age 85 and older,

which is the age group with the greatest need for long-term care. Recent

legislation authorizing a new federal employees’ long-term care insurance

offering and proposals that would establish new tax subsidies for the

purchase of private long-term care insurance aim to increase the role

private insurance plays in financing long-term care. Increased confidence

in long-term care insurance and the availability of affordable, reliable

products are also crucial components of private insurance if it is expected

to play a larger role in financing future generations’ long-term care needs.

Concluding

Observations
Long-Term Care: Baby Boom Generation

Increases Challenge of Financing Needed

Services

Page 16 GAO-01-563T

Chairman Grassley and Ranking Member Baucus, this concludes my

prepared statement. I will be happy to answer any questions that you or

Members of the Committee have at this time.

For more information regarding this testimony, please contact Kathryn G.

Allen at (202) 512-7118 or John Dicken at (202) 512-7043. Opal

Winebrenner and Carolyn Yocom also made key contributions to this

statement.

GAO Contacts and

Staff

Acknowledgments
Page 17 GAO-01-563T

Long-Term Care Insurance: Better Information Critical to Prospective

Purchasers (GAO/HEHS-00-196, Sept. 13, 2000).

Medicare Home Health Care: Prospective Payment System Could Reverse

Recent Declines in Spending (GAO/HEHS-00-176, Sept. 8, 2000).

Medicare and Medicaid: Implementing State Demonstrations for Dual

Eligibles Has Proven Challenging (GAO/HEHS-00-94, Aug. 18, 2000).

Medicare: Refinements Should Continue to Improve Appropriateness of

Provider Payments (GAO/T-HEHS-00-160, July 19, 2000).

Low-Income Medicare Beneficiaries: Further Outreach and Administration

Could Increase Enrollment (GAO/HEHS-99-61, Apr. 9, 1999).

Long-Term Care: Baby Boom Generation Presents Financing Challenges

(GAO/T-HEHS-98-107, Mar. 9, 1998).

Health Care Reform: Supplemental and Long-Term Care Insurance

(GAO/T-HRD-94-58, Nov. 9, 1993).

(290052)

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