(1007)

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

Out-of-Pocket Spending by Medicare Beneficiaries

Background Data on Long-Term Care

The Long-Term Care Population Age 65 and Older

Paying for Long-Term Care Services

Medicaid Spending on Long-Term Care

Private Long-Term Care Insurance

References

HEALTH STATUS

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. 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 2 for

a discussion of health insurance supplementing Medicare coverage).

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 17.7

years in 1997 (table B–1). 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. Improvements for blacks have been greater than for whites;

however, blacks’ life expectancy at birth was still 6 years less than

that for whites in 1997. 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 (table B–2). However,

the proportion of overweight seniors seems to be increasing. Under

the new definition for overweight that was adopted in 1998 by the

National Institutes of Health (National Heart, Lung, and Blood Institute, 1998), the proportion of overweight seniors has climbed

from about 55 percent in the 1971–74 time period to over 60 percent for females and over 68 percent for males in the 1988–94 time

period.

1008

TABLE B–1.—LIFE EXPECTANCY AT BIRTH AND AT 65 YEARS OF AGE, BY SEX AND

RACE, SELECTED YEARS 1950–97

[Remaining life expectancy in years]

Year

At birth At 65 years At birth

Both

sexes Male Female Bothsexes 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 74.7 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 68.9

1989 ............... 75.1 71.7 78.5 17.1 15.0 18.8 75.9 68.8

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 ............... 76.1 73.1 79.1 17.5 15.7 19.0 76.8 70.2

1997 ............... 76.5 73.6 79.4 17.7 15.9 19.2 77.1 71.1

1 Includes deaths of nonresidents of the United States in the 1950 and 1960 data.

Source: National Center for Health Statistics (1999a, Table 28, p. 139).

TABLE B–2.—SELECTED HEALTH STATUS INDICATORS FOR PERSONS 65–74 YEARS OF

AGE, BY SEX, SELECTED PERIODS 1971–94

[Percent of population]

Health status indicator

Male Female

1971–74 1976–80 1988–94 1971–74 1976–80 1988–94

Hypertension 1 .................. 67.2 67.1 57.3 78.3 71.8 60.8

High serum cholesterol

(Mean serum cholesterol level, 2 in mg/dL).

34.7

(226)

31.7

(221)

21.9

(212)

57.7

(250)

51.6

(246)

41.3

(233)

Overweight 3 ..................... 54.6 54.2 68.5 55.9 59.5 60.3

1 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. 2 High serum cholesterol is defined as greater than or equal to 240 mg/dL (6.20 mmol/L). Risk levels

were defined by the Second Report of the National Cholesterol Education Program Expert Panel on Detection, Evaluation and Treatment of High Blood Cholesterol in Adults. National Institutes of Health, September 1993. 3 Overweight is defined as body mass index greater than or equal to 25 kilograms/meter 2. (In previous

years, this table reflected a definition of overweight as body mass index greater than or equal to 27.8

for men and 27.3 for women, resulting in substantially lower proportions of the population being considered overweight.)

Note.—Data are based on measured height and weight of a sample of the civilian, noninstitutionalized population.

Source: National Center for Health Statistics (1999a, Tables 68, 69, 70, pp. 221–23).

1009

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. Almost half report having arthritis, about 40 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 REPORTED CHRONIC CONDITIONS PER 1,000 ELDERLY

PERSONS, BY AGE AND FAMILY INCOME, 1995

Chronic condition All

elderly

Age Family income

65–74

75

and

older

Less

than

$10,000

$10,000–

$19,999

$20,000–

$34,999

$35,000

and over

Arthritis ..................... 490 448 548 633 503 442 413

Cataracts .................. 159 105 234 250 146 141 177

Hearing impairment .. 284 236 351 298 310 289 286

Deformity or orthopedic impairment 178 166 193 252 196 191 149

Hernia of abdominal

cavity .................... 55 54 55 57 55 56 70

Diabetes .................... 126 133 117 212 98 144 94

Heart disease ............ 308 268 364 333 308 335 229

High blood pressure 1 403 392 420 482 432 381 328

Chronic sinusitis ....... 153 157 149 188 194 156 125

Emphysema ............... 34 36 32 50 36 39 21

1 As self-reported in the 1995 National Health Interview Survey; the higher 1988–94 hypertension data

in table B–2 are from physical examination of a sample population.

Source: National Center for Health Statistics (1998, Table 57, pp. 77–78 and Table 60, pp. 83–86).

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 (table

B–4).

Family income is directly related to 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 1995, about 51 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 less deVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01009 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.017 WAYS3 PsN: WAYS3
1010

pendency in later life (Kolata, 1996). It should be noted that living

longer is the demographic trend, but it is not known what the

tradeoffs are between cost of care and quality of life.

TABLE B–4.—SELF-ASSESSED HEALTH STATUS OF THE ELDERLY, BY SEX AND FAMILY

INCOME, 1995

[In percent]

Characteristic

All persons 1

(thousands)

Self-assessed health status 2

ExcellentVery

good Good Fair Poor

Sex:

Men ............................................. 13,139 15.5 22.7 33.0 19.4 9.4

Women ........................................ 18,327 14.9 23.1 34.0 19.7 8.3

Family income: Under $10,000 ............................ 4,158 8.9 20.5 29.9 26.7 13.9

$10,000–$19,999 ....................... 7,233 13.2 20.5 34.1 22.6 9.5

$20,000–$34,999 ....................... 7,363 16.1 24.0 34.3 18.1 7.5

$35,000 and over ....................... 5,738 23.3 27.7 32.3 12.3 4.4

All persons 65+ years 3 ..... 31,466 15.1 22.9 33.6 19.6 8.8

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 (1998, Table 70, pp. 107–8).

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. 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 (NCHS), 1999a). In 1997, heart disease still accounted for 35

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 1997,

cerebrovascular disease accounted for only 8 percent of all deaths

in the 65 and older age group.

Alzheimer’s disease 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. Reported death rates increased rapidly in the

first decade of reporting, as the diagnosis gained more acceptance

and as diagnostic procedures changed. The trend in mortality levVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01010 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.017 WAYS3 PsN: WAYS3
1011

eled off from 1988 through 1992, then rose slowly from 1992 to

1995, and now seems to have leveled off again. This pattern may

mean that reporting practices for Alzheimer’s disease have stabilized (NCHS, 1999c and NCHS, 1999b). Alzheimer’s affects approximately 4 million Americans at present, including about 1 in

10 persons over 65 (Alzheimer’s Association, 1999). Some studies

show that nearly half of all people age 85 and older have some

form of dementia (National Institute on Aging, 1999). Death rates

from Alzheimer’s are also highly age related (NCHS, 1999b). 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. Future morbidity and mortality from

Alzheimer’s disease will increase as the population continues to age

unless new treatments or a cure are found.

TABLE B–5.—DEATH RATES FOR LEADING CAUSES OF DEATH AMONG OLDER PEOPLE,

BY AGE, 1997

[Death rates per 100,000 population in age group]

Rank Cause of death

Age

65+ 65–74 75–84 85+

1 Diseases of the heart .................... 1,781 754 1,944 6,199

2 Malignant neoplasms .................... 1,124 847 1,335 1,805

3 Cerebrovascular diseases .............. 412 135 462 1,585

4 Chronic obstructive pulmonary diseases ......................................... 277 165 360 562

5 Pneumonia and influenza .............. 228 57 234 1,025

6 Diabetes ......................................... 139 88 167 294

7 Accidents ........................................ 92 46 103 276

8 Alzheimer’s disease ....................... 65 11 73 299

9 Nephritis, nephrotic syndrome, nephrosis ....................................... 64 26 74 218

10 Septicemia ..................................... 53 23 60 178

All other causes ............................. 839 358 916 2,904

All causes ...................................... 5,074 2,510 5,728 15,345

Source: National Center for Health Statistics (1999b, Table 7, pp. 24–26, and Table 8, p. 28).

MEDICARE REIMBURSEMENT AND OUT-OF-POCKET

LIABILITIES OF THE ELDERLY

Tables B–6 through B–8 illustrate for selected years how Medicare reimbursement, acute health care costs, and out-of-pocket liabilities of Medicare enrollees respectively have changed. The years

chosen are 1975, 1980, 1985, 1990, 1995, and 2000. Constant 2000

dollar values were obtained using the Consumer Price Index for All

Urban Consumers (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 10.7 percent, while the growth in total Medicare costs

(including enrollees’ share of costs) is 8.9 percent (table B–6). As

1012

a result, the share of SMI costs reimbursed by Medicare increases

significantly over the period—from about 64 percent in 1975 to

about 79 percent by 2000. 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 1975–2000

[Incurred costs per hospital insurance or supplementary medical insurance enrollee]

Source

Year Average

annual

rate of

growth

1975–

2000

(percent)

1975 1980 1985 1990 1995 2000

In current dollars

Hospital insurance:

Reimbursement .... $466 $920 $1,570 $1,981 $3,201 $3,431 8.3

Copayments ......... 34 67 119 187 244 273 8.6

Total ................ 500 986 1,690 2,168 3,445 3,704 8.3

Supplementary medical insurance:

Reimbursement .... 186 399 766 1,307 1,819 2,378 10.7

Copayments ......... 84 137 248 400 547 610 8.3

Balance billing .... 22 56 87 68 13 6 ¥5.1

Total ................ 291 592 1,101 1,775 2,379 2,994 9.8

Total Medicare

reimbursement.

651 1,318 2,336 3,288 5,020 5,809 9.7

Total costs

under Medicare.

792 1,579 2,791 3,944 5,824 6,698 8.9

In constant 2000 dollars

Hospital insurance:

Reimbursement .... 1,415 1,908 2,493 2,588 3,585 3,431 3.6

Copayments ......... 105 138 189 245 273 273 3.9

Total ................ 1,519 2,046 2,682 2,833 3,859 3,704 3.6

Supplementary medical insurance:

Reimbursement .... 564 827 1,215 1,707 2,038 2,378 5.9

Copayments ......... 254 285 394 523 613 610 3.6

1013

TABLE B–6.—REIMBURSEMENTS AND OUT-OF-POCKET COSTS UNDER MEDICARE,

SELECTED YEARS 1975–2000—Continued

[Incurred costs per hospital insurance or supplementary medical insurance enrollee]

Source

Year Average

annual

rate of

growth

1975–

2000

(percent)

1975 1980 1985 1990 1995 2000

Balance billing .... 67 117 138 89 15 6 ¥9.2

Total ................ 885 1,229 1,748 2,319 2,665 2,994 5.0

Total Medicare

reimbursement.

1,978 2,735 3,708 4,295 5,623 5,809 4.4

Total costs

under Medicare.

2,405 3,275 4,430 5,152 6,524 6,698 4.2

Percent of

costs paid

by Medicare.

82.3 83.5 83.7 83.4 86.2 86.7 0.2

Note.—Values after 1995 are projected; CPI–U was used to calculate constant dollars.

Source: Congressional Budget Office (2000).

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 2000 (table

B–6).

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 86.7 percent in

2000 (table B–6). The share of costs paid directly by enrollees is

shown in the third panel of table B–7. Total direct costs (excluding

premiums) 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 2000, 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

(table B–8 for deductible amounts and monthly premium amounts

under Medicare).

TABLE B–7.—ENROLLEE COSTS UNDER MEDICARE, SELECTED YEARS 1975–2000

[Incurred costs per hospital insurance or supplementary medical insurance enrollee]

Source

Year Avera

rate 

197

(pe

1975 1980 1985 1990 1995 2000

In current dollars

Hospital insurance copayments .......................................... $34 $67 $119 $187 $244 $273 Supplementary medical insurance copayments ................. 84 137 248 400 547 610 Balance billing .................................................................... 22 56 87 68 13 6 

Total direct costs ....................................................... 140 260 455 656 804 889 

Premium costs .................................................................... 80 110 186 343 553 546 

Total enrollee costs .................................................... 221 371 641 999 1,357 1,435 

Enrollee per capita income 1 .............................................. 5,158 8,431 12,767 15,454 16,460 24,381 

In constant 2000 dollars

Hospital insurance copayments .......................................... 105 138 189 245 273 273 Supplementary medical insurance copayments ................. 254 285 394 523 613 610 Balance billing .................................................................... 67 117 138 89 15 6 

Total direct costs ....................................................... 426 540 722 857 901 889 

Premium costs .................................................................... 244 229 295 448 620 546 

Total enrollee costs .................................................... 670 769 1,017 1,305 1,520 1,435 

Enrollee per capita income 1 .............................................. 15,663 17,489 20,269 20,190 18,438 24,381 

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 4.1

Supplementary medical insurance copayments ................. 10.6 8.7 8.9 10.1 9.4 9.1

Balance billing .................................................................... 2.8 3.6 3.1 1.7 0.2 0.1

Total direct costs ....................................................... 17.7 16.5 16.3 16.6 13.8 13.3

Premium costs .................................................................... 10.2 7.0 6.7 8.7 9.5 8.2

Total enrollee costs .................................................... 27.9 23.5 23.0 25.3 23.3 21.4

Enrollee-paid costs as a percent of enrollee per capita

income 1 .......................................................................... 4.3 4.4 5.0 6.5 8.2 5.9 

1 From the Current Population Survey, with income adjusted for underreporting.

Note.—Values after 1995 are projected. The CPI–U was used to calculate constant dollars.Source: Congressional Budget Office, unpublished tables, March 2000.

1016

TABLE B–8.—COPAYMENT AND PREMIUM VALUES UNDER MEDICARE, SELECTED

CALENDAR YEARS, 1975–2000

Year Average

annual

rate of

growth

1975–

2000

(percent)

1975 1980 1985 1990 1995 2000

In current dollars

Hospital insurance: Hospital deductible $92 $180 $400 $592 $716 $776 8.9

Supplementary medical

insurance:

Annual deductible .. 60 60 75 75 100 100 2.1

Monthly premium 1 6.70 9.20 15.50 28.60 46.10 45.50 8.0

In constant 2000 dollars

Hospital insurance:

Hospital deductible 279 373 635 773 802 776 4.2

Supplementary medical

insurance:

Annual deductible .. 182 124 119 98 112 100 ¥2.4

Monthly premium 1 20.35 19.08 24.61 37.36 51.64 45.50 3.3

1 The 1980 supplementary medical insurance monthly premium amount is the average of values for the

first and second halves of the year.

Note.—Values after 1995 are projected. The CPI–U was used to calculate constant dollars.

Source: Congressional Budget Office (2000).

Enrollees spend a slightly larger share of their income for Medicare’s cost sharing and premium charges than they did in 1975

(table B–7). 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. However,

the percentage declined to 5.9 percent in 2000.

OUT-OF-POCKET SPENDING BY MEDICARE

BENEFICIARIES

In 1995, Medicare covered approximately 55 percent of the

health care expenditures of program beneficiaries (57 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 12 percent of the health costs of the Medicare population while private insurance covered 9 percent and

other sources (such as the Veterans Administration) covered an additional 5 percent. (For a discussion of supplemental coverage see

section 2, Medicare.) However, beneficiaries still financed 19 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 perVerDate 20-JUL-2000 13:14 Sep 29, 2000 Jkt 061710 PO 00000 Frm 01016 Fmt 6601 Sfmt 6601 J:\SKAYNE\GB96\61710.017 WAYS3 PsN: WAYS3
1017

cent for hospital services to 49 percent for prescription drugs and

82 percent for dental care. Beneficiaries also paid approximately 32

percent of their long-term facility care costs out of pocket (Olin et

al., 1999).

A recent estimate projected that out-of-pocket spending by the el- derly would total about $2,430 or 19 percent of income in 1999.

There is considerable variation among beneficiaries in actual outof-pocket costs. Over half of beneficiaries (55 percent) were projected to spend less than $2,000 in 1999. Twenty percent were projected to spend between $2,000 and $3,000. The remaining 25 percent would spend over $3,000.

Payments for Medicare cost-sharing charges and items not covered by Medicare (such as prescription drugs and dental care) represented 54 percent of average out-of-pocket spending in 1999. The

remaining 46 percent was for premium payments for Medicare part

B, Medicare+Choice plans, and private insurance (table B–9).

TABLE B–9.—AVERAGE OUT-OF-POCKET SPENDING ON HEALTH CARE BY NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER, 1999 PROJECTIONS

[In percent]

Item Percent

Goods and services:

Prescription drugs .............................................................................. 17

Dental ................................................................................................. 8

Nursing home care (short-term) ........................................................ 8

Physician, supplier, and vision .......................................................... 17

Outpatient hospital ............................................................................ 3

Inpatient hospital ............................................................................... 3

Total goods and services .......................................................... 54

Premiums:

Medicare part B ................................................................................. 19

Private insurance (including Medicare+Choice) ................................ 27

Total premiums ......................................................................... 46

Total ................................................................................. 100

Note.—Totals do not sum due to rounding.

Source: AARP (1999).

The average level of out-of-pocket spending varies by type of supplemental coverage. Beneficiaries with Medigap were projected to

spend the most out of pocket, even more than those without any

supplemental protection. (Persons with Medigap coverage also have

higher Medicare costs than persons with no supplemental protection; see Section 2). Table B–10 shows the projected out-of-pocket

costs for aged Medicare beneficiaries by source of supplemental coverage. It also shows what this spending represents as a percentage

of income. Persons who are either covered under the Specified LowIncome Medicare Beneficiary Program or who have only part-year

1018

Medicaid coverage were projected to spend the highest portion of

their incomes on health care. (For a discussion of the specified lowincome Medicare beneficiary population, see Section 2.)

TABLE B–10.—AVERAGE OUT-OF-POCKET SPENDING ON HEALTH CARE BY NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER, BY SUPPLEMENTAL

HEALTH INSURANCE STATUS, 1999 PROJECTIONS

Source of supplemental coverage Out-of-pocket

costs

Percentage of

income 1

Medicare-only ............................................................ $2,505 22

Employer .................................................................... 2,545 16

Medigap ...................................................................... 3,250 26

Medicare+Choice ........................................................ 1,630 12

Medicaid ..................................................................... 280 5

Qualified Medicare beneficiary 2 ................................ 840 13

Specified low-income Medicare beneficiary 2/part

year Medicaid ......................................................... 2,630 30

All beneficiaries ........................................ 2,430 19

1 Average out-of-pocket spending as a percent of income is calculated as the average of each beneficiary’s share of income spent out of pocket for health care. 2 Full year coverage.

Source: AARP Public Policy Institute: Out-of-Pocket Spending on Health Care by Medicare Beneficiaries

Age 65 and Older: 1999 Projections, IB#41, December 1999.

Out-of-pocket spending patterns differ considerably by source of

supplementary coverage. For example, Medicare-only beneficiaries

were projected to spend a relatively small share of their health care

goods and services dollars on prescription drugs and dental care;

the majority of their spending is for items and services that would

otherwise be covered under supplemental coverage. Conversely,

beneficiaries who have employer-sponsored coverage are projected

to spend a larger portion of their goods and services dollars on

drugs and dental care. Medicare+Choice enrollees incur relatively

low out-of-pocket costs for both goods and services and premiums

(table B–11).

Out-of-pocket spending tends to rise with income. However, the

share of income spent on health care falls as income rises (table B–

12). Overall, persons below 100 percent of poverty spend 33 percent

of their incomes on out-of-pocket health care costs. However, poor

persons without Medicaid coverage were projected to spend 49 percent of their incomes out of pocket for health care (AARP, 1999).

TABLE B–11.—OUT-OF-POCKET HEALTH CARE SPENDING FOR NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER, BY TY

SPENDING AND INSURANCE COVERAGE, 1999 PROJECTIONS

Total Medicare only Employer Medigap Medicare+ Choice Full year Medicaid

Full year

qualified

Medicare

beneficiary

F

spec

inco

ca

fic

year 

Part B and private insurance premiums:

Medicare part B premium contributions 1 ....................... $455 $465 $500 $525 $525 0 0 Private insurance/HMO premium contributions ............... 645 0 630 1,360 195 $30 $65 

Subtotal of part B and private insurance premiums ................................................................. 1,100 465 1,130 1,885 720 30 65 

Health care goods and services:

Inpatient hospital ............................................................. 65 355 35 30 35 45 25 Outpatient hospital .......................................................... 60 175 60 45 25 5 20 Physician/supplier/vision .................................................. 400 655 465 415 200 65 275 Nursing facility ................................................................. 200 285 280 30 145 50 125 Dental ............................................................................... 195 140 230 200 250 5 110 Prescription drugs ............................................................ 410 430 345 645 255 80 220 

Subtotal for health care goods and services ......... 1,330 2,040 1,415 1,365 910 250 775 

Average out-of-pocket spending .................... 2,430 2,505 2,545 3,250 1,630 280 840 

1 The average part B premium contribution represents an average premium cost over the entire year. The average contribution differs between each group because of d

in the number of months that each group’s average enrollee was enrolled in Medicare.

Note.—Out-of-pocket health care spending excludes home care services and long-term nursing facility care. Numbers are rounded to the nearest $5. Numbers may no

total because of rounding.

Source: AARP (1999).

1020

TABLE B–12.—AVERAGE OUT-OF-POCKET SPENDING ON HEALTH CARE BY NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER BY INCOME LEVEL AND

AS A PERCENTAGE OF INCOME, 1999 PROJECTIONS

Income level (as a percentage of poverty) Spending Percentage of

income

<100 percent .............................................................. $1,770 33

100 to <125 percent .................................................. 2,080 25

125 to <200 percent .................................................. 2,420 24

200 to <400 percent .................................................. 2,480 17

400 to <600 percent .................................................. 2,700 13

600 percent and above .............................................. 2,605 8

All persons .................................................................. 2,430 19

Source: AARP (1999).

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 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, getting around inside the home,

and transferring from a bed to a chair. 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

1021

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,

shopping, light housework, telephoning, and money management.

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 57 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 AGE 65 AND OLDER

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 5.3 million elderly persons required

assistance with ADLs and IADLs in 1994. This is about 16 percent

of the Nation’s elderly. Of this total, an estimated 3.9 million elderly persons resided in their own homes or other community-based

settings and 1.4 million elderly were residing in nursing homes. Of

the total residing in the community, 30 percent, or 1.2 million had

severe disabilities, needing help with at least 3 ADLs. The remaining 2.7 million resided in the community with lower levels of disability (Spectur et al., 1998).

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. The

Lewin Group, Inc. estimates show that the number of elderly needing help with ADLs and/or IADLs may grow from 5.5 million in

2000, to 7.4 million in 2020, a 42 percent increase.

PAYING FOR LONG-TERM CARE SERVICES

Table B–13 indicates that sizable public and private funds are

being spent on long-term care for the elderly—estimated at $98 billion in 2000. Medicaid and Medicare account for the bulk of this

spending, $55 billion or 56 percent of the total.

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TABLE B–13.—ELDERLY LONG-TERM CARE EXPENDITURES BY SOURCE OF PAYMENT,

2000

[In billions of dollars]

Source of spending Amount

Institutional care:

Medicaid ............................................................................................. $31.0

Medicare ............................................................................................. 11.2

Other public payors ............................................................................ (1)

Out-of-pocket payments ..................................................................... 28.2

Long-term care insurance .................................................................. 0.3

Total ........................................................................................... 70.7

Home and community-based care:

Medicaid ............................................................................................. 4.9

Medicare ............................................................................................. 8.1

Other public payors ............................................................................ 2.8

Out-of-pocket payments ..................................................................... 11.3

Long-term care insurance .................................................................. 0.2

Total ........................................................................................... 27.3

Total long-term care ........................................................ 98.0

1 Less than $1 million.

Source: Lutzsky et al. (1999).

Approximately 72 percent of long-term care spending on the elderly is for institutional care. Examination of the sources of payment for nursing home care reveals that the elderly face significant

uncovered liability for this care—an estimated 40 percent of institutional care is paid by the elderly themselves out of pocket. Medicaid accounts for another 43 percent of institutional care.

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 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 costs often in excess of $50,000

per year.

Table B–13 also indicates that nearly all private spending for

nursing home care is paid directly by consumers out of pocket. Private insurance coverage for long-term nursing home care is very

limited, with private insurance payments estimated to be only

about 0.3 percent of total spending for nursing home care in 2000.

(Private long-term care insurance is discussed in additional detail

below.)

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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 2000, spending on home and

community-based care for the elderly is estimated to be about $27

billion, or 27 percent of total long-term care spending for the elderly. This spending does not take into account the substantial support provided to the elderly by family and friends. Research has

found that about 57 percent of functionally impaired elderly living

in the community rely exclusively on unpaid sources, generally

family and friends, for their care. Only 7 percent of the impaired

residing in the community rely totally on paid providers for care.

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 is

estimated to pay for only 15 percent of the elderly’s nursing home

spending in 2000.

For similar reasons, Medicare pays for only limited 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.

Medicare’s spending for home health care for the elderly is estimated to be about 27 percent of home and community-based longterm care in 2000.

Three other Federal programs—the Social Services Block Grant,

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 Social Services Block

Grant 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, States devote significant State

funds to home and community-based long-term care services. One

study indicated that 39 States reported one or more State-only

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funded home and community-based service programs for the elderly in 1996. These State programs spent more than $1.2 billion on

services (Kassner and Williams).

MEDICAID SPENDING ON LONG-TERM CARE

The Medicaid Program, a means-tested Federal-State health program for the poor, is the major source of public support for longterm care for persons of all ages. It funds a broad range of longterm care services, including nursing facility care, home health

care, personal care, and various home and community-based services.

Table B-14 shows Medicaid spending for major long-term care

services for persons of all ages for 1990 and 1997. Medicaid spending for long-term care almost doubled in 7 years, increasing from

$30.2 billion in 1990 to $56.8 billion in 1997. Nursing home care

accounted for the majority of Medicaid spending on long-term care

in both years, but declined slightly as a proportion of the total over

the period. In fiscal year 1997, nursing facility care represented 58

percent of total long-term care spending; intermediate care facilities for the mentally retarded represented 17 percent; and home

and community-based services represented almost 25 percent.

TABLE B–14.—MEDICAID SPENDING ON SELECTED LONG-TERM CARE SERVICES, 1990

AND 1997

[In billions of dollars]

Long-term care services

1990 1997

Amount Percent Amount Percent

Nursing facility care ................................. $18.4 60.9 $33 58.1

Intermediate care facilities for the mentally retarded ........................................ 7.7 25.5 9.7 17.1

Home and community-based services 1 ... 4.1 13.6 14.1 24.8

Total ............................................. 30.2 100 56.8 100

1 Includes home and community-based waiver services, home and community-based services for the

frail elderly, personal care, and home health services, and other community-based services.

Source: Urban Institute estimates based on data from HCFA–64 reports.

The proportion of total Medicaid long-term care spending for intermediate care facilities for the mentally retarded declined over

the period from 26 percent to 17 percent of long-term care spending. This continues a trend toward deinstitutionalization of persons

with mental retardation and developmental disabilities in favor of

care in community-based settings that began during the 1970s.

From 1990 to 1997, the proportion of total spending devoted to

home and community-based services increased from almost 14 percent to 25 percent (from $4.1 billion in 1990 to $14.1 billion in

1997). This shift reflects, in part, greater use by States of Medicaid

waivers for home and community-based services. Section 1915(c) of

the Medicaid statute allows the Health Care Financing Administration to waive certain statutory requirements in order to assist

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States in financing care at home and in other community-based

settings for persons, who, without these services would be in institutions. States have flexibility to define the specific populations

with disabilities and services to be covered. A wide range of services may be provided to persons with disabilities of all ages, including case management, respite services for care givers, and personal

care services.

Medicaid’s spending for long-term care 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 Statedetermined 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 SSI

cash welfare payment (300 percent of $512, or $1,536 per month

in 2000).

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:

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1. For discharged nursing home residents, approximately onethird of those admitted as private-pay residents eventually

spent down to Medicaid (spend down method 1). Just over onequarter 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 privatepay 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 considered by some to be a

promising private sector option for providing the elderly with protection against the high cost of long-term care and/or reliance on

public sector programs such as Medicaid. Although it is a relatively

new insurance product, the market has grown rapidly. In 1986, approximately 20 insurers were selling long-term care insurance policies of some type, and an estimated 200,000 persons owned a policy. By 1987, a U.S. Department of Health and Human Services

(DHHS) Task Force on Long-Term Health Care Policies found 73

companies writing long-term care insurance policies covering

423,000 persons. As of June 1998, the Health Insurance Association of America (HIAA) reported that more than 5.84 million policies had been sold, with 119 insurers offering coverage (Coronel,

2000). (This is a cumulative total of policies ever sold, not policies

currently in force.)

Individuals who purchase long-term care insurance policies are

protected against some or all of the costs of personal care if they

become unable to carry out certain activities of daily living such as

eating, bathing, dressing, toileting, continence, and transferring in

and out of bed or a chair. Policies may also pay for care for those

with cognitive impairments such as Alzheimer’s disease. Care in a

variety of settings may be covered, including assisted living or

nursing facilities or the individual’s own home. Policies vary with

regard to features such as the number of functional losses that

trigger payment of the benefit; limits on the amount of the payments the policy will make to the caretaker or facility (e.g., a specified dollar amount per day); whether payments are a flat daily

amount regardless of documented expenses or are paid only as reimbursement for approved expenditures; the length of time over

which benefits are paid (such as 1 year, 3 years, or for life); a waiting period between the qualifying impairment and commencement

of payment; conditions under which benefits may be forfeited if premium payments lapse; and adjustment in payment amounts to account for inflation between the time the policy is purchased and

the commencement of benefit payments.

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related factors, or may be sold to a group such as employees of a

firm. The policies may be priced on the basis of substantial ‘‘underwriting,’’ meaning the carrier asks the applicant for detailed information regarding his or her medical history, or policies may be sold

with little or no underwriting. Underwriting is used by carriers to

protect against the ‘‘adverse risk selection’’ that could occur if individuals were sold a policy when they were likely soon to need longterm care.

Affordability

One of the key issues outstanding in the debate on the role private insurance can play in financing long-term care is affordability.

The cost an individual pays for a long-term care insurance policy

with a certain benefit package is determined by the individual’s

age at the time he or she purchases the policy. Generally, premiums remain fixed throughout the policyholder’s lifetime. (Under

certain circumstances, a carrier may raise rates for all policyholders.) The younger the individual is when a policy is purchased,

the lower the premiums are.

The HIAA examined the cost of 80 percent of all policies sold in

1997 to individuals and to groups. The 1997 annual premium cost

of policies paying $100 per day for nursing home care and $50 for

home care, with lifetime 5 percent compounded inflation protection

and a 20-day deductible period were $1,850 if purchased at the age

of 65, rising to $5,880 if purchased at age 79. Many elderly individuals cannot afford to purchase policies at such rates. Although

some believe that long-term care insurance can potentially shift

long-term care costs from the public sector to private insurers, others question the extent to which this market will continue to expand if the product is perceived as very costly, particularly among

older individuals who are more likely to be concerned about needing long-term care.

Employer-based group coverage

The insurance industry has argued that long-term care insurance

coverage could be more affordable and coverage expanded if insurance were purchased at group rates by individuals still in their

working years. Because the premiums for most employer-based

group plans are paid by the employee (or other covered group member) rather than by the employer, employees are price sensitive

with regard to their premiums. Some say that because employerbased group plans may be 15 to 30 percent less costly than policies

purchased individually, focusing expansion of coverage on employer-sponsored group policies can address the price issue (Cutler,

1999). Employment-based group premiums are lower because: (1)

marketing can be targeted to younger individuals who generally

have lower rates; (2) savings can be achieved through lower administrative costs and lower commissions; and (3) employers can bargain for reduced profit percentages and improved benefits. For example, the policy described above, which cost a 65-year-old $1,850,

would cost a 50-year-old employee purchasing it under an

employer-based group plan $888 on average.

According to the HIAA, employer-based activity has increased

steadily over the years. By mid-1998, over 800,000 policies had

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been sold across 2,185 employers. These employer-based plans may

cover employees, their spouses, retirees, parents, and parents-inlaw. In addition, the number of long-term care riders that permit

conversion of at least some portion of life insurance policies to longterm care benefits has grown from 1,300 in 1988 to a cumulative

total of 345,000 in 1998.

President Clinton proposed in 1999 that the Federal Government, as the Nation’s largest employer, set an example for other

employers and establish a long-term care insurance program under

which private group insurance would be available to Federal workers, retirees, and certain relatives, and for which the policyholder

would pay the full cost of the premium. Several bills were introduced in the 106th Congress to authorize a long-term care insurance program for Federal employees, retirees, and their relatives.

Tax qualified plans and Tax Code requirements

The Internal Revenue Code (IRC), as amended by the Health Insurance Portability and Accountability Act of 1996 (HIPAA, Public

Law 104–191), detailed below, sets certain standards for qualified

insurance contracts issued after December 31, 1996. The standards

include provisions in the 1993 National Association of Insurance

Commissioners’ model act and model regulations regarding reporting and disclosure of the terms and conditions of the policies and

consumer protections for individuals purchasing a policy. Failure to

meet these requirements may result in imposition of a Federal tax

penalty on the carrier.

The IRC requires the insurance policies to meet minimum standards regarding the eligibility rules that trigger payment of benefits

(e.g., the inability of a ‘‘chronically ill’’ individual to perform two

out of six specified ADLs for at least 90 days, with qualified policies required to include five of the following six specified ADLs: eating, toileting, transferring, bathing, dressing, and continence) and

the definition of services for which benefits are payable (e.g., diagnostic, preventive, therapeutic kinds of services as well as maintenance and personal care). Like payments made to policyholders

from other kinds of accident and health insurance policies, longterm care insurance payments are not taxable income to the policyholder if the payments are made in accordance with the minimum

eligibility and benefit rules of the IRC. However, payment of benefits to or on behalf of an individual who does not meet the eligibility rules (e.g., is unable to perform only one of the listed ADLs)

might result in the benefits being taxable. (Tax-qualified policies

may have eligibility requirements that are more stringent than the

minimum standards in the IRC.)

Individuals who itemize their deductions may deduct part or all

of their premiums for tax-qualified long-term care policies to the

extent that premium payments plus their other deductible medical

expenses exceed 7.5 percent of annual adjusted gross income. The

amount that may be deducted depends on the policyholder’s age.

HIPAA provision details

Public Law 104–191 amended the Tax Code to treat private longterm care insurance the way health insurance policies and health

1029

care expenses are treated under the Code. These amendments 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 $190 per day

per person in 2000, 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 longterm care services, are fully includable in income and subject

to taxation.)

2. Employer-paid premiums for qualified long-term care insurance policies are excluded from the gross income of the employee, and are, therefore, exempt from taxation. This favorable tax treatment, however, is not extended to employer-sponsored cafeteria plans or flexible spending arrangements. (Longterm care insurance premiums paid by a private 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. The age-adjusted limits on the amount of the annual premium that is deductible range in 2000 from $220 for

persons age 40 or under to $2,570 for persons over age 70.

These limits are indexed for inflation.

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 (regardless

of whether the individual itemizes other deductions). 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

1030

future benefits; and meets certain consumer protection standards.

Policies issued before January 1, 1997, and meeting a State’s longterm care insurance requirements at the time the policy was

issued, would be considered a qualified plan for purposes of favorable tax treatment. The tax treatment of nonqualified policies,

which some consumers may prefer because they may be more generous, is uncertain.

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 (the Health Insurance Portability and Accountability Act of 1996, HIPAA) 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 DHHS) 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. 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

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fied requirements. The exclusion is limited to payments for longterm care services not compensated for by insurance or otherwise.

Expanding coverage

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 DHHS 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 longterm 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.

REFERENCES

AARP Public Policy Institute. (1999, December). Out-of-Pocket

Spending on Health Care by Medicare Beneficiaries Age 65 and

Older: 1999 Projections (IB#41). Washington, DC: Author.

Angell, M. (1993). Privilege and health—What is the connection?

New England Journal of Medicine, 329(2), 126–27.

Alzheimer’s Association. (1999, March 26). The Facts: Statistics/

Prevalence. Washington, DC: Author.

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