B-1 

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 

Supplementing Medicare Coverage 

Medicare Reimbursement and Out-of-Pocket Liabilities of the Elderly 

Health Care Expenditures of Medicare Beneficiaries 

Projected Drug Spending 

Long-Term Care for Persons with Disabilities 

Overview 

Providers of Long-Term Care 

Long-Term Care Spending 

Federal Programs That Provide 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, 

supplementary insurance, and long-term care insurance of the elderly. 

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 17.9 years in 2000 (Table B-1). The overall 

trend since the early 20th 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 almost 6 years less than that for 

whites in 2000. Some morbidity indicators, such as the prevalence of high blood 

pressure (hypertension) and high serum cholesterol, improved among those aged 

65-74 years in the 1970s, 1980s and early 1990s (Table B-2). However, while 

serum cholesterol readings have continued their downward trend, the data for 

1999-2000 show that the gains have been reversed for hypertension. More than 

two-thirds of both men and women aged 65-74 have elevated blood pressure. 

Furthermore, the proportion of overweight seniors has increased markedly. Under 

the definition for overweight that was adopted in 1998 by the National Institutes of 
B-2 

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 70 percent for females and over 77 percent for males in the 1999-2000 time 

period. Within that group is a large number of people who are considered obese (33 

percent of men and nearly 39 percent of women aged 65-74). 

TABLE B-1--LIFE EXPECTANCY AT BIRTH AND AT 65 

YEARS OF AGE, BY SEX AND RACE, SELECTED YEARS 

1950-2000 

[Remaining life expectancy in years]

At Birth At 65 Years 

Year Both 

Sexes Male Female White Black Both Sexes Male Female 

19501 68.2 65.6 71.1 69.1 60.8 13.9 12.8 15.0 

19601 69.7 66.6 73.1 70.6 63.6 14.3 12.8 15.8 

1970 70.8 67.1 74.7 71.7 64.1 15.2 13.1 17.0 

1980 73.7 70.0 77.4 74.4 68.1 16.4 14.1 18.3 

1990 75.4 71.8 78.8 76.1 69.1 17.2 15.1 18.9 

1991 75.5 72.0 78.9 76.3 69.3 17.4 15.3 19.1 

1992 75.8 72.3 79.1 76.5 69.6 17.5 15.4 19.2 

1993 75.5 72.2 78.8 76.3 69.2 17.3 15.3 18.9 

1994 75.7 72.4 79.0 76.5 69.5 17.4 15.5 19.0 

1995 75.8 72.5 78.9 76.5 69.6 17.4 15.6 18.9 

1996 76.1 73.1 79.1 76.8 70.2 17.5 15.7 19.0 

1997 76.5 73.6 79.4 77.1 71.1 17.7 15.9 19.2 

1998 76.7 73.8 79.5 77.3 71.3 17.8 16.0 19.2 

1999 76.7 73.9 79.4 77.3 71.4 17.7 16.1 19.1 

2000 76.9 74.1 79.5 77.4 71.7 17.9 16.3 19.2 

1

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

Source: National Center for Health Statistics (2002a, Table 28). 

Among the elderly, the 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 prevalence of several common chronic conditions among the elderly. About 

one-third report having heart disease, nearly 37 percent have arthritis, and 18 

percent report some form of cancer. Over 40 percent report trouble with their 

hearing, and 18 percent have trouble with their vision, even with correction. The 

prevalence of many chronic conditions is directly related to age and inversely 

related to financial status. (Cancer and hearing trouble are exceptions, being 

reported by more people with higher incomes.) 
B-3 

TABLE B-2--SELECTED HEALTH STATUS INDICATORS FOR 

PERSONS 65-74 YEARS OF AGE, BY SEX, 

SELECTED PERIODS 1971-2000 

[Percent of population]

Male Female Health Status 

Indicator 1971-74 1976-80 1988-94 1999-00 1971-74 1976-80 1988-94 1999-

00 

Hypertension1 67.2 67.1 57.3 68.3 78.3 71.8 60.6 73.4 

High serum 

cholesterol 34.7 31.7 21.9 19.2 57.7 51.6 41.3 37.4 

(Mean serum 

cholesterol level,2

 

in mg/dL) 

226 221 212 210 250 246 233 229 

Overweight3 54.6 54.2 68.5 77.2 55.9 59.5 60.3 70.1 

Obesity3 10.9 13.2 24.1 33.4 22.0 21.5 26.9 38.8 

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 (BMI) greater than or equal to 25 kilograms/meter, 

and obesity is defined as BMI greater than or equal to 30 kilograms/meter. The percent of persons 

with obesity is a subset of the percent who are overweight. 

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

Source: National Center for Health Statistics (2002a, Tables 68, 69, 70). 

Self-assessed health is a common method used to measure health status, with 

responses ranging from excellent to poor. Over 73 percent of elderly people living 

in the community describe their health as excellent, very good, or good; only 

27 percent report that their health is fair or poor (Table B-4). Men are slightly more 

likely than women to report very good or excellent health. 

Family income is directly related to elderly people's perception of their 

health. In 1998, about 45 percent of older people with incomes over 

$20,000 described their health as excellent or very good, while only 27 percent of 

those with incomes less than $20,000 reported excellent or very good health 

(National Center for Health Statistics (NCHS), unpublished data). 

Surveys on long-term care indicate that rates of chronic disability among the 

elderly have declined significantly (Manton, 2001). 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 dependency in later life. Others caution, however, that more research is 

needed to understand the causes of these improvements and the implications for 

future health care costs and demand for services (Freedman, 2002). 
B-4 

TABLE B-3--SELECTED REPORTED DISEASES AND CONDITIONS 

AMONG ELDERLY PERSONS, BY AGE AND POVERTY STATUS, 

1998 

[Percent of population]

Age Poverty status2 

Condition (65+ years) All 

elderly 65-74 75+ Poor Near poor Not poor 

Heart disease 32.0 28.2 37.0 38.3 34.7 32.3 

Stroke 8.3 6.9 10.0 10.9 10.2 7.5 

Emphysema 5.1 5.0 5.1 7.1 6.4 4.2 

Asthma 7.8 8.3 7.1 11.7 9.3 7.8 

Sinusitis 15.4 17.0 13.5 17.5 17.3 14.3 

Cancer 17.8 16.5 19.5 14.7 16.2 20.1 

Diabetes 13.2 14.3 12.5 20.5 15.3 12.3 

Ulcers 13.7 13.1 14.4 17.1 15.8 14.2 

Arthritic symptoms 36.8 34.4 40.3 46.5 44.8 35.4 

Hearing trouble3 41.3 34.1 50.4 40.6 43.4 42.9 

Vision trouble4 18.0 13.5 23.7 26.3 23.8 15.8 

1

Treatment of unknown values (responses coded as ‘refused,’ ‘don=t know,’ or ‘not 

ascertained’) for the conditions above: the unknowns are included in the denominators when 

calculating percents for the AAll elderly@ column, but are not included in the denominators 

when calculating percents for the AAge@ and APoverty status@ columns. The overall number of 

unknowns is quite small. 

2

Poverty status is based on family income and family size using the U.S. Census Bureau=s poverty 

thresholds. APoor@ persons are defined as below the poverty threshold. ‘Near poor’ persons have 

incomes of 100 percent to less than 200 percent of the poverty threshold. ‘Not poor’ persons have 

incomes that are 200 percent of the poverty threshold or greater. 3

Respondents were asked about their hearing without a hearing aid (includes those responding 

‘a little trouble,’ ‘a lot of trouble,’ or ‘deaf.’) 

4

Respondents were asked if they had trouble seeing even when wearing glasses or contact 

lenses. 

Source: National Center for Health Statistics (2002b, Tables 1-8, pp. 13-28 and Tables 11-12, 

pp. 33-36). 

TABLE B-4--SELF-ASSESSED HEALTH STATUS OF THE ELDERLY, 

BY SEX, FAMILY INCOME, AND POVERTY STATUS, 1998 

[In percent]

Self-assessed health status1

Characteristic 

Excellent Very good Good Fair Poor 

Sex: 

Men 14.8 24.4 34.6 18.4 7.9 

Women 13.3 24.2 35.4 19.1 8 

All persons 65+ years 13.9 24.3 35.1 18.8 7.9 

Family income: 

Less than $20,000 10.3 17.0 36.9 24.6 11.2 

$20,000 or more 17.3 27.9 34.9 14.6 5.3 
B-5 

TABLE B-4--SELF-ASSESSED HEALTH STATUS OF THE ELDERLY, 

BY SEX, FAMILY INCOME, AND POVERTY STATUS, 1998-continued 

[In percent] 

Self-assessed health status1

Characteristic 

Excellent Very good Good Fair Poor 

Poverty status:2 

Poor 7.3 17.4 31.7 28.1 15.6 

Near poor 9.7 20.4 31.9 25.1 12.9 

Not poor 17.2 28.5 35.7 14.1 4.4 

Note-Percentages may not add to 100 percent due to rounding. Data are based on household 

interviews of the civilian, non-institutionalized population. 

1

The categories related to this concept result from asking the respondent, ‘Would you say your 

general 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. Persons who refused to answer 

or said they did not know are excluded from the calculations. 

2

Poverty status is based on family income and family size using the U.S. Census Bureau=s poverty 

thresholds. ‘Poor’ persons are defined as below the poverty threshold. ‘Near poor’ persons have 

incomes of 100 percent to less than 200 percent of the poverty threshold. ‘Not poor’ persons have 

incomes that are 200 percent of the poverty threshold or greater. 

Source: National Center for Health Statistics (unpublished special data run, based on 2002b, 

Table 21, pp. 57-58). 

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, nearly two-thirds (63 percent) of elderly 

persons die from heart disease, cancer, or stroke. Heart disease was the major cause 

of death among the elderly in 1950, 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. The death rate for cancer among the elderly, 

however, rose between 1950 and 1995, due especially to increases in lung cancer 

deaths; since 1995, the rate has decreased slightly (NCHS, 2002a, pp. 52-53, 69). 

In 2000, heart disease still accounted for 33 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 elderlyBstroke (cerebrovascular 

disease)Bhas been decreasing over the past 40 years. In 2000, cerebrovascular 

disease accounted for only 8 percent of all deaths in the 65 and older age group. 

Alzheimer's disease is now the seventh leading cause of death for older 

people. Alzheimer's has only been classified as a unique cause of death since 1979. 

 Reported death rates have increased rapidly as the diagnosis has gained more 

acceptance and as diagnostic procedures changed. Recent large increases in the 

death rate in the 1998-2000 time period are hard to interpret because of changes to 

the coding and selection rules under the International Classification of Diseases 

(NCHS, 2002c). New data indicate that Alzheimer's affects approximately 

4.5 million Americans at present, including about 1 in 10 persons over 65 and 

nearly half of those over age 85 (Alzheimer=s Association, 2003). Death rates from 

Alzheimer's are also highly age related (NCHS, 2002c). Presence of Alzheimer's 
B-6 

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. By 2050, an estimated 13.2 million 

Americans could have the disease (Alzheimer=s Association, 2003). 

TABLE B-5--DEATH RATES FOR LEADING CAUSES OF DEATH 

AMONG OLDER PEOPLE, BY AGE, 2000 

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

Age Rank Cause of Death 

65+ 65-74 75-84 85+ 

1 Diseases of the heart 1,707 674 1,787 5,849 

2 Malignant neoplasms 1,128 826 1,341 1,796 

3 Cerebrovascular diseases 426 130 463 1,568 

4 Chronic lower respiratory diseases 306 172 388 640 

5 Influenza and pneumonia 168 40 161 734 

6 Diabetes mellitus 151 92 180 316 

7 Alzheimer's disease 141 19 140 659 

8 Nephritis, nephrotic syndrome, 

nephrosis 90 38 101 274 

9 Accidents (unintentional injuries) 89 42 96 270 

10 Septicemia 71 31 81 213 

All other causes 898 364 951 3,003 

All causes 5,175 2,429 5,688 15,322 

Source: National Center for Health Statistics (2002d, Table 1, pp. 14-15, and 2002c, Table 11, 

p. 33). 

SUPPLEMENTING MEDICARE COVERAGE 

Most beneficiaries depend on some form of private or public coverage to 

supplement their Medicare coverage (Table B-6). In 2000, only about 13 percent 

of beneficiaries relied solely on the traditional fee-for-service Medicare program for 

protection against the costs of care; an additional 13 percent were enrolled in 

managed care organizations. (See Appendix E for a discussion of 

Medicare+Choice). The majority of the Medicare population (56 percent in 2000) 

have private supplemental coverage. This private insurance protection may be 

obtained through a current or former employer (29 percent in 2000). It may also be 

obtained through an individually purchased policy, commonly referred to as a 

“Medigap” policy (23 percent had these plans in 2000). Some persons have both 

(4 percent in 2000). In addition, a smaller percentage (about 16 percent in 2000) 

have Medicaid coverage; a small group (2 percent in 2000) have supplemental 

coverage from one of a variety of other public sources (such as the military). 

Employer-Based Policies 

Employers may offer their retirees health benefits. Several surveys have 

attempted to quantify the percentage of employers offering this coverage. Since 
B-7 

each survey uses a different database, the numbers differ somewhat. However, all 

show that the number offering such plans has declined in recent years. 

TABLE B-6--TYPES OF SUPPLEMENTAL HEALTH INSURANCE 

HELD BY MEDICARE BENEFICIARIES, 2000 

[In percent]

Type of Coverage Percent 

Medicare Only 26 

Fee-for-Service 13 

Managed Care 13 

Private Coverage 56 

Employer-sponsored 29 

Medigap 23 

Both 4 

Public coverage 18 

Medicaid 16 

Other 2 

Total 100 

Note-Medicaid includes qualified Medicare beneficiaries (QMBs) and specified low-income 

Medicare beneficiaries (SLIMBs). 

Source: Centers for Medicare and Medicaid Services. Program Information on Medicare, 

Medicaid, SCHIP and other programs of the Centers for Medicare and Medicaid Services, chart 

book, June 2002 edition. 

 A survey by Mercer shows that over a 10-year period (1993-2002) the 

number of employers (with over 500 employees) offering health plan coverage to 

retirees (both current and future retirees) under age 65 fell from 46 percent to 

29 percent, while the number providing coverage to Medicare-eligible retirees fell 

from 40 percent to 23 percent. (Mercer)

A joint study done by The Kaiser Family Foundation and Health Research 

and Educational Trust (HRET) shows similar trends. From 1998 to 2003, the 

percentage of large employers (with 200 or more employees) offering coverage to 

all retirees dropped from 66 percent to 38 percent. Of those offering retiree 

coverage in 2003, 93 percent offered coverage to early retirees while 78 percent 

offered coverage to Medicare age retirees. (Kaiser and HRET). 

A 2002 survey of private firms with 1,000 or more workers by Kaiser and 

Hewitt Associates (Kaiser and Hewitt) showed that 91 percent of these employers 

offered retiree coverage. Of those offering benefits, 74 percent offered new retirees 

under age 65 (defined as those retiring on or after January 1, 2002) a choice of two 

or more health plans; 60 percent offered a choice of two or more plans to new 

retirees age 65 and over. The two most common types of plans offered to pre-65 

retirees were preferred provider organizations (PPOs) and health maintenance 

organizations (HMOs). For age 65 and over retirees, the two most common plan 

options were indemnity (or managed indemnity) followed by 

Medicare+Choice/HMO plans. The surveyed firms made substantial changes in 

recent years in response to rising costs. Forty-four percent increased retiree 

contributions to premiums, 36 percent increased cost-sharing for retirees; 13 percent 
B-8 

terminated health benefits for future retirees; and 7 percent shifted to a defined 

contribution approach. Conversely 17 percent reported adding benefits or 

improving coverage. 

Medigap

Beneficiaries with Medigap insurance typically have coverage for 

Medicare=s deductibles and coinsurance; they may also have coverage for some 

items and services not covered by Medicare. Individuals who first purchase a 

Medigap policy on or after July 30, 1992, select from one of 10 basic standardized 

plans, though not all 10 plans are offered in all states. The 10 plans are known as 

Plan A through Plan J. Plan A covers a basic package of benefits. Each of the 

other nine plans includes the basic benefits plus a different combination of 

additional benefits. Plan J is the most comprehensive. A change authorized by the 

Balanced Budget Act of 1997 (BBA 97) added two high deductible plans to the list 

of 10 standardized plans. With the exception of the high deductible feature ($1,650 

in 2003), the benefit packages under the high deductible plans are the same as under 

Plan F or Plan J. Reportedly, few insurers are offering these high deductible plans. 

Only three of the standardized plans, Plans H-J, offer prescription drug 

coverage. All three plans impose a $250 drug deductible. Plans H and I cover 50 

percent of the next $2,500 in costs up to a maximum benefit of $1,250 ($2,750 total 

spending). Plan J covers 50 percent of the next $6,000 in costs up to a maximum 

benefit of $3,000 ($6,250 total spending). The premiums for these plans are higher 

than those for the other seven Medigap plans, in large measure due to the drug 

coverage. 

There is wide variation in Medigap premiums for both drug and non-drug 

policies nationwide. This reflects a number of factors including differences in the 

benefits of Plan A through Plan J, differences in medical underwriting practices, 

and differences in pricing structures. Periodically, Weiss Ratings, Inc., under 

contract with CMS, reports on its inventory of Medigap premiums for 65-year old 

males (Table B-7). Over the 2-year period 1998-2000, the average premium 

increases were 15.5 percent for policies without drug coverage compared to 

37.2 percent for policies with coverage. The rate slowed substantially in 2002, with 

only a 2.4 percent increase recorded for all policies over the previous year. For all 

3 years, premiums, and premium increases vary greatly by location.

 The law contains certain requirements which guarantee the ability of 

beneficiaries to enroll in Medigap plans under certain specified conditions. These 

guaranteed issue provisions, outlined below, were significantly expanded by three 

recent laws: BBA 1997, the Balanced Budget Refinement Act of 1999 (P.L.106-

113), and the Medicare, Medicaid, and SCHIP Benefits Improvement and 

Protection Act of 2000 (BIPA 2000, P.L.106-554). 

Six-Month Open Enrollment-- Federal law establishes an open enrollment 

period for the aged. All insurers offering Medigap policies are required to offer 

open enrollment for 6 months from the date a person first enrolls in Part B 

(generally when the enrollee turns 65). During this time an insurer cannot deny the 

issuance, or discriminate in the pricing of a policy because of an individual=s 
B-9 

medical history, health status or claims experience. This requirement is known as 

guaranteed open enrollment. If an individual applies for a Medigap policy after the 

open enrollment period, the company is permitted to use medical underwriting. 

This means that the company can use an individual=s medical history to decide 

whether or not to accept the application and how much to charge for the policy. 

TABLE B-7--AVERAGE NATIONWIDE MEDIGAP PREMIUMS FOR A 

65-YEAR OLD MALE, 1998, 2000, AND 2002 

Plan 1998 average 2000 average 2002 average 

Without drug coverage: 

A $631 $766 $864 

B 875 1,026 1,139 

C 1,065 1,239 1,372 

D 900 1,050 1,218 

E 963 1,107 1,172 

F 1,164 1,301 1,432 

G 1,071 1,175 1,285 

With drug coverage: 

H 1,573 2,347 2,738 

I 1,803 2,423 2,734 

J 2,408 3,065 3,344 

Source: (1) Weiss Ratings, Inc. Prescription Drug Costs Boost Medigap Premiums 

Dramatically. Press Release. March 26, 2001; and (2) Weiss Ratings, Inc. Rate of Medigap 

Premiums Slows Dramatically in 2002. Press Release, August 7, 2002 and information 

provided by Weiss. 

There is no guaranteed open enrollment period for the non-aged disabled 

population. However, when a disabled person turns 65, that individual has the same 

open enrollment period as other aged persons. 

Guaranteed Issue--The law guarantees issuance of specified Medigap policies 

(without an exclusion based on a pre-existing condition) for certain 

persons whose previous supplementary coverage was terminated. Guaranteed issue 

also applies to certain persons who elect to try out a Medicare+Choice plan. In 

these cases, individuals are guaranteed issue of specific Medigap plans (generally 

A, B, C, or F) that are sold to new enrollees by Medigap insurers in the state. The 

insurer is prohibited from discriminating in the pricing of such a policy on the basis 

of the individual=s health status, claims experience, receipt of health care or 

medical condition. This right must be exercised within 63 days of termination of 

other enrollment. Table B-8 summarizes the guaranteed issue protections of the 

law. It highlights the event that triggers these protections, the time period during 

which an affected individual can enroll in a Medigap plan, and the types of 

Medigap plans that are guaranteed. 
B-10 

TABLE B-8--GUARANTEED ISSUE PROTECTIONS 

Current Coverage; 

Trigger Event 

First Day to Apply 

for Medigap under 

Guaranteed Issue 

Provisions 

Last Day to 

Apply for 

Medigap under 

Guaranteed 

Issue Provisions 

Medigap Plans 

Guaranteed 

Employee Benefits Plan 

An individual enrolled 

under a plan that provides 

benefits supplementing 

Medicare and the plan 

terminates or ceases to 

provide all such 

supplemental benefits 

Date received notice 

of termination or 

cessation of benefits 

(in some cases this 

could be in a letter 

saying that a claim 

has been denied 

because coverage has 

ended) 

63 days later A, B, C, or F 

Medicare+Choice Plan 

A. Plan Leaves Area or 

Stops Providing 

Coverage. 

An individual enrolled 

with a Medicare+Choice 

plan1 whose enrollment 

is discontinued because 

the plan is leaving the 

Medicare program or is 

no longer providing 

coverage in the 

individual=s service area 

(See also C and D which 

may apply in these 

cases) 

Date received 

termination notice 

63 days after 

coverage ends 

A, B, C, or F 
B-11 

TABLE B-8--GUARANTEED ISSUE PROTECTIONS-continued

Current Coverage; 

Trigger Event 

First Day to Apply 

for Medigap under 

Guaranteed Issue 

Provisions 

Last Day to 

Apply for 

Medigap under 

Guaranteed 

Issue Provisions 

Medigap Plans 

Guaranteed 

B. Enrollee Moves. The 

individual moves outside 

of the entity=s

1

 service 

area 

Date received 

termination notice 

63 days after 

coverage ends 

A, B, C, or F 

C. Medicare+Choice 

Trial. An individual was: 

1) enrolled in a Medigap 

policy; 2) subsequently 

terminated enrollment in 

that policy and enrolled 

in a Medicare+Choice 

organization1

for the first 

time; and 3) then 

terminated enrollment 

with the 

Medicare+Choice 

organization within 12 

months2

60 days before 

disenrollment date 

(except, in cases of 

involuntary 

termination, date of 

receipt of 

termination notice) 

63 days after 

coverage ends 

Former 

Medigap 

policy (If the 

same policy is 

no longer sold 

by the insurer, 

the guarantee 

is for plans A, 

B, C, or F) 

D. Medicare+Choice 

Enrollment Upon 

Turning 65. An 

individual, upon turning 

65 and becoming eligible 

for Part A, joins a 

Medicare+Choice plan 

and subsequently leaves 

the plan within 1 year4

60 days before 

disenrollment date 

(except, in cases of 

involuntary 

termination, date of 

receipt of 

termination notice) 

63 days after 

coverage ends 

or end of 6-

month open 

enrollment 

period, 

whichever is 

later 

Any Medigap 

policy 

E. Entity Fails to Meet 

Contract Obligations. The 

individual elects to 

disenroll with a 

Medicare+Choice 

organization1

 due to cause 

(for example, the 

marketing materials were 

misleading or quality 

standards were not met) 

60 days before 

disenrollment date 

63 days after 

coverage ends 

A, B, C, or F 
B-12 

TABLE B-8--GUARANTEED ISSUE PROTECTIONS-continued 

Current Coverage; 

Trigger Event 

First Day to Apply 

for Medigap under 

Guaranteed Issue 

Provisions 

Last Day to 

Apply for 

Medigap under 

Guaranteed 

Issue Provisions 

Medigap Plans 

Guaranteed 

Medigap 

A. Bankruptcy or 

Insolvency of Issuer. An 

individual enrolled under 

a Medigap policy if 

enrollment ceases 

because of the bankruptcy 

or insolvency of the 

issuer or because of other 

involuntary termination 

of enrollment and there is 

no provision under state 

law for continuation of 

such coverage 

Earlier of the date 

that the notification 

of termination is 

received or the date 

the coverage ends 

63 days after 

coverage ends 

A, B, C, or F 

B. Cause. The individual 

disenrolls because the 

issuer violated a material 

provision of the policy or 

materially misrepresented 

the policy=s provisions 

60 days before 

disenrollment date 

63 days after 

coverage ends 

A, B, C, or F 

1

 Also applies to 1) Programs of All-Inclusive Care for the Elderly (PACE) program (for 

persons 65 or older) that covers Medicare benefits and certain long-term care services; 2) 

Medicare managed care demonstration projects; and 3) Medicare SELECT plans if there 

is no provision under applicable state law for continuation or conversion of coverage 

under such policy. 

2 In general, the guarantee only applies if the individual was never previously enrolled in a 

Medicare+Choice or similar plan. However, special rules apply if an individual enrolls 

for the first time w.ith a Medicare+Choice organization and was in the plan less than 1 

year before the plan left the program or stopped giving care in the area. In this case, the 

individual may enroll in another Medicare+Choice plan for up to 1 year and still keep the 

right to return to his or her old Medigap policy. 

3

 Also applies to enrollees in a PACE program. 

4

 Special rules apply if an individual enrolls with a Medicare+Choice organization and 

was in the plan less than 1 year before the plan left the program or stopped giving care in 

the area. In this case, the individual may enroll in another Medicare+Choice plan for up 

to 1 year and still keep the right to obtain any Medigap policy. 

Source: Congressional Research Service.

Pre-Existing Condition Exclusions-- For purposes of Medigap, pre-existing 

conditions are defined as those diagnosed or treated during the 6 months 

immediately preceding the start of a Medigap policy. At the time insurers sell a 
B-13 

Medigap policy they are generally permitted to limit or exclude coverage for 

services related to a preexisting health condition. Such pre-existing condition 

exclusions cannot be imposed for more than 6 months. However, preexisting 

limitations may not be imposed at all in the following cases: 

 Any individual who falls into one of the qualifying events categories 

discussed above under “Guaranteed Issue.” These include persons whose 

previous coverage was involuntarily terminated or persons who elect to 

try out Medicare+Choice. 

 During the first 6-month open enrollment period, if on the date of 

application, the individual had health insurance coverage meeting the 

definition of “creditable coverage” under the Health Insurance Portability 

and Accountability Act. (Note that the insurer may impose a pre-existing 

exclusion limitation if the individual did not have such creditable 

coverage.) 

 An individual who met the pre-existing condition limitation in one 

Medigap policy. The individual does not have to meet the requirement 

under a new policy for previously covered benefits; however, an insurer 

could impose exclusions for newly covered benefits (for example for 

prescription drugs if not covered under the previous policy). 

The prohibition applies to persons who had coverage under a prior policy for 

at least 6 months. If the individual has less than 6 months prior coverage, the policy 

must reduce the pre-existing exclusion by the amount of the prior coverage. 

Medicaid

Some low-income aged and disabled Medicare beneficiaries are also eligible 

for full or partial coverage under Medicaid. Medicaid is a federal-state program 

which provides health insurance coverage to certain low-income individuals. 

Within broad federal guidelines, each state sets its own eligibility criteria, including 

income eligibility standards. Persons meeting the state standards are entitled to full

coverage under Medicaid. Persons entitled to full Medicaid protection generally 

have all of their health care expenses met by a combination of Medicare and 

Medicaid. For these “dual eligibles,” Medicare pays first for services both 

programs cover. Medicaid picks up Medicare cost-sharing charges and provides 

protection against the costs of services generally not covered by Medicare (such as 

long-term care). Perhaps the most important service for the majority of dual 

eligibles is prescription drugs. These dual eligibles typically have comprehensive 

coverage with only nominal cost-sharing. 

Federal law specifies several population groups that are entitled to more 

limited Medicaid protection. These are qualified Medicare beneficiaries (QMBs), 

specified low income beneficiaries (SLIMBs), and certain qualified individuals. 

QMBs and SLIMBs are not entitled to Medicaid=s prescription drug benefit unless 

they are also entitled to full Medicaid coverage under their state=s Medicaid 

program. Qualifying individuals are never entitled to Medicaid drug coverage 

(because, by definition, they are not eligible for full Medicaid benefits). 

The following are the three coverage groups: 
B-14 

 

 Qualified Medicare Beneficiaries (QMBs)--QMBs are aged or disabled 

persons with incomes at or below the federal poverty level. In 2003, the 

monthly level is $769 for an individual and $1,030 for a couple.1

 They 

must also have assets below $4,000 for an individual and $6,000 for a 

couple. QMBs are entitled to have their Medicare cost-sharing charges, 

including the Part B premium, paid by the federal-state Medicaid program. 

 Medicaid protection is limited to payment of Medicare cost-sharing 

charges (i.e., the Medicare beneficiary is not entitled to coverage of 

Medicaid plan services) unless the individual is otherwise entitled to 

Medicaid. 

 Specified Low-Income Medicare Beneficiaries (SLIMBs)--These are 

persons who meet the QMB criteria, except that their income is over the 

QMB limit. The SLIMB limit is 120 percent of the federal poverty level. 

In 2003, the monthly income limits are $918 for an individual and 

$1,232 for a couple.2

 Medicaid protection is limited to payment of the 

Medicare Part B premium (i.e., the Medicare beneficiary is not entitled to 

coverage of Medicaid plan services) unless the individual is otherwise 

entitled to Medicaid. 

 Qualifying Individuals (QI-1s)--These are persons who meet the QMB 

criteria, except that their income is between 120 percent and 135 percent 

of poverty; the monthly income limit for QI-1 for an individual is $1,031 

and for a couple $1,384. Medicaid protection for these persons is limited 

to payment of the monthly Medicare Part B premium.3

Other Coverage

Some beneficiaries with a military service connection may receive health 

insurance coverage through Department of Defense or Department of Veterans 

Affairs programs. P.L.106-398, the Defense department authorization bill for 2000 

authorized a permanent comprehensive health care benefit for Medicare-eligible 

military retirees thereby making all military retirees eligible for health care within 

TRICARE, the military health care system, effective October 1, 2001. Under the 

law, Medicare pays first and TRICARE is the secondary payer, subject to a $300 

1

 The annual HHS poverty guidelines for 2003 are $8,980 for an individual and $12,120 for a couple; the 

monthly figures are $748 for an individual and $1,010 for a couple. The qualifying levels are higher 

because, by law, $20 per month of unearned income (rounded to the next dollar) is disregarded in the 

calculation. Sources: Department of Health and Human Services. Annual Update of the HHS Poverty 

Guidelines. Notice, Federal Register, vol. 68, no.26, February 7, 2003; and 

http://www.cms.hhs.gov/dualeligibles/rate.asp. 

2

 This is calculated the same way as the QMB level. See preceding footnote. 

3

 In general, Medicaid payments are shared between the federal government and the states according to a 

matching formula. However, expenditures under the QI-1 program are paid for 100 percent by the 

Federal government (from the Part B trust fund) up to the State=s allocation level. A State is only 

required to cover the number of persons which would bring its spending on these population groups in a 

year up to its allocation level. This temporary program, originally slated to end September 30, 2002, has 

been extended through March 31, 2004, by P.L.108-89. The program known as QI-2 terminated on 

September 30, 2002.
B-15 

deductible. Previously, individuals lost their TRICARE eligibility when they 

became eligible for Medicare. The law also authorized, effective April 1, 2001, a 

comprehensive retail and mail order pharmacy benefit and a national mail order 

pharmacy benefit for all eligible beneficiaries. There are deductibles for use of 

non-network pharmacies and co-payments for pharmaceuticals received from the 

National Mail Order Pharmacy and from retail pharmacies. 

Drug Coverage

Medicare does not cover most outpatient prescription drugs. Beneficiaries 

may have access to drug benefits through their managed care plan or supplemental 

health insurance plan. In 1998, 73 percent of the non-institutionalized Medicare 

population had drug coverage at some point during the year; the remaining 27 

percent had no coverage. The likelihood that a beneficiary has prescription drug 

coverage varies by the source of coverage. Beneficiaries enrolled in HMOs were 

the most likely to have drug coverage while those in Medigap plans were the least 

likely to have such coverage. (See Table B-9.) It should be noted that Table B-9

shows the percentage of beneficiaries who had drug coverage at any point during 

1998. Some beneficiaries do not, however, have drug coverage for the entire year. 

Further, the figures do not reflect the extent and depth of coverage which varies 

widely by source of coverage. 

TABLE B-9--DISTRIBUTION OF NONINSTITUTIONALIZED 

MEDICARE BENEFICIARIES, BY TYPE OF SUPPLEMENTAL 

INSURANCE AND PRESENCE OF DRUG COVERAGE, 1998 

[In percent]

Type of coverage 1 With drug coverage Without drug coverage 

All persons 73 27 

No supplemental coverage 0 100 

Supplemental coverage 

Medicare HMO2 92 8 

Medicaid3 89 11 

Employer-sponsored 90 10 

Medigap 43 57 

All other 89 11 1

 Beneficiaries were classified by their primary health insurance and were counted in only one of

the categories (in the hierarchical order as shown in the table for beneficiaries with more than one 

type). 

2

 Includes persons receiving drug coverage through both their basic plans and optional coverage. 

3 The Medicaid number reflects the percentage of all persons on the Medicaid rolls, including the 

QMB-only and SLIMB-only population (who do not have drug coverage). If just the population 

with full Medicaid coverage were taken into account, the percentage should be closer to 100 

percent. 

Source: Poisal, John A., and Lauren Murray. Growing Differences Between Medicare 

Beneficiaries With and Without Drug Coverage. Health Affairs, v. 20, no. 2, March/April 

2001. 
B-16 

In 1998, persons in higher income brackets were more likely to have drug 

coverage. This reflects the fact that these persons were more likely to have drug 

coverage through a former employer. Persons below poverty had coverage levels 

slightly higher than persons just above poverty. This reflects the fact that many 

individuals below poverty were eligible for full Medicaid benefits which include 

drug benefits. The lowest levels of coverage were for persons between 100 percent 

and 175 percent of poverty. These persons are the least likely to have access to 

employer-based coverage or Medicaid. The 1998 number reflects a slight 

improvement for the low-income population over previous years. 

Medicare+Choice (M+C)--The percentage of M+C enrollees with access to 

prescription drug coverage has declined in recent years. In 1999, 65 percent of the 

Medicare population had access to at least one M+C coordinated care plan that 

included prescription drug coverage. In 2003, 50 percent of the Medicare 

population has access to such a plan. An additional 10 percent have access through 

preferred provider organizations demonstration projects and private fee-for-service 

plans. Among persons with access to M+C coordinated care plans, 87 percent in 

urban counties and 70 percent in rural counties have access to drug coverage. 

Beneficiaries can get M+C drug coverage through a basic plan or a plan with 

supplemental benefits. In 1999, 84 percent of M+C enrollees in coordinated care 

plans had drug coverage through their basic plans; the percentage dropped to 

69 percent in 2003. 

The scope of coverage available to beneficiaries has been declining. For 

example, more plans are limiting coverage to generic drugs only. In 2002, 

30 percent of those with drug coverage in their basic plan only had coverage for 

generic drugs; this percentage increased to 44 percent in 2003. One-quarter of 

those with generic coverage only were subject to an annual cap (CMS, 2003). 

Employer-Based Coverage-- Persons with employer-based coverage typically 

have coverage similar to that offered to current workers. The Kaiser/Hewitt survey 

of large employers (1,000 or more) showed that the vast majority of employers that 

offered retiree health benefits for those age 65 and over (96 percent) provided 

coverage for prescription drugs. Most (80 percent) offered the benefits as part of 

their retiree health benefits plan, while a small percentage (15 percent) offered 

coverage through a separate, employer-subsidized stand-alone drug plan. Only one 

percent offered an unsubsidized drug discount card or other program. The vast 

majority of those offering drug coverage provided unlimited drug benefits, while 11 

percent had a separate drug benefit limit. Of those employers with the largest 

number of retirees 65 and over, 31 percent had design features specific to the drug 

benefit, such as a separate deductible or separate out-of-pocket maximum. Ninetythree percent of those large firms offering retiree drug benefits offered both retail 

and mail order coverage. Only 14 percent with a mail order option required 

enrollees to use mail order. Sixty-six percent of employers contract directly with a 

pharmacy benefit manager (PBM) to administer the plan that enrolls the largest 

number of age 65 and over retirees (Kaiser/Hewitt). 

Prescription drug benefits represent a large part of plan expenses for retirees. 

As a result, many plans are taking actions to contain these costs. These include 
B-17 

imposing either a two-tiered cost-sharing structure (one payment for generic drugs 

and another for brand name drugs) or three-tiered cost-sharing structure (one 

payment for generic drugs, another for brand name drugs with no generic substitute 

and a third for brand-name drugs with a generic substitute). 

Medigap--As noted previously, only 3 of the 10 standardized Medigap plans 

include drug coverage. A number of observers have concluded that only those 

persons who expect to actually utilize a significant quantity of prescriptions actually 

purchase such coverage. This is because there is a significant price difference 

between premiums for policies with drug coverage versus those for policies without 

drug coverage. This adverse selection tends to further drive up the premium costs. 

One analysis of the Medigap market found that about 60 percent of 

policyholders had no drug coverage. This figure included the 90 percent of 

beneficiaries purchasing standardized plans (i.e., Plans A- J, first purchased on or 

after July 30, 1992). Three out of four Medigap policyholders with prescription 

drug coverage were in prestandard Medigap plans; many of these plans offer 

coverage that is even less generous than that available under standard plans. As of 

2003, enrollees in prestandard plans are at least 76 years old. Since in most states 

Medigap insurers can deny issuance of Medigap policies after the open enrollment 

period at age 65, persons with prestandard policies who wish to change plans 

generally have no alternative except Plan A (if their current carrier is willing to sell 

them this) or Medicare+Choice (if a M+C plan is available in their area) (Chollet). 

Medicaid--As noted previously, persons with full Medicaid coverage 

generally have access to a prescription drug benefit. However, QMB-only, SLIMBonly, and QI-1 beneficiaries do not have access to drug coverage through the 

Medicaid program. 

State Pharmaceutical Assistance Programs--Some Medicare beneficiaries 

have coverage through state pharmaceutical assistance programs which provide 

financial assistance to low-income persons who do not qualify for Medicaid. The 

National Conference of State Legislatures (NCSL) reports that as of October 2003, 

28 states had programs in operation, with some states having more than one 

program. The state programs vary substantially both in design and coverage. Most 

states had subsidy programs; while some states operated pharmaceutical discount 

programs for the purchase of prescription drugs. Virtually all states set income 

eligibility standards for their subsidy programs. Many subsidy plans required some 

level of beneficiary financial participation in the form of premiums, deductibles, 

copayments, or a combination of these. The level of coverage also varied among 

the States (NCHSL). 

MEDICARE REIMBURSEMENT AND OUT-OF-POCKET LIABILITIES 

OF THE ELDERLY 

Tables B-10 through B-12 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, 2000, and 2003. Constant 2003 dollar values were obtained using the 
B-18 

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 8.7 percent (Table B-10). As a result, the 

share of SMI costs reimbursed by Medicare increases significantly over the period--

from about 63 percent in 1975 to about 76 percent by 2003. 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-10 -- REIMBURSEMENTS AND OUT-OF-POCKET COSTS 

UNDER MEDICARE, SELECTED CALENDAR YEARS 1975-2003 

 

1975 1980 1985 1990 1995 2000 2003

Annual 

Growth 

1975-2003 

(in percent) 

 [In millions of current dollars] 

Hospital Insurance 

Reimbursement 462 895 1,554 1,963 3,130 3,272 3,739 7.8 

Copayments 34 66 118 186 263 290 326 8.4 

 Total 496 961 1,671 2,149 3,393 3,562 4,065 7.8 

Supplementary Medical Insurance 

Reimbursement 180 390 768 1,304 1,823 2,381 3,134 10.7 

Copayments 84 137 248 400 659 857 966 9.1 

Balance-billing 22 56 87 68 11 6 9 -3.3 

 Total 286 583 1,104 1,772 2,493 3,244 4,108 10.0 

Total Medicare Reimbursements 642 1,285 2,322 3,267 4,953 5,653 6,873 8.8 

Total Costs Under Medicare 782 1,545 2,775 3,921 5,886 6,806 8,174 8.7 

 [In millions of constant 2003 dollars] 

Hospital Insurance 

Reimbursement 1,498 1,978 2,653 2,749 3,772 3,485 3,739 3.3 

Copayments 111 146 201 261 317 308 326 3.9 

 Total 1,609 2,124 2,854 3,010 4,089 3,793 4,065 3.4 

Supplementary Medical Insurance 

Reimbursement 583 861 1,312 1,826 2,197 2,536 3,134 6.2 

Copayments 271 303 424 560 794 913 966 44.6 

Balance-billing 72 125 149 96 13 7 9 -7.3 

 Total 927 1,289 1,885 2,483 3,004 3,455 4,108 5.5 

Total Medicare Reimbursements 2,082 2,839 3,965 4,576 5,969 6,020 6,873 4.4 

Total Costs Under Medicare 2,536 3,413 4,738 5,493 7,094 7,248 8,174 4.3 

Percent of costs 82.1 83.2 83.7 83.3 84.2 83.1 84.1 0.1 

Note- Values after 2000 are projected. The CPI-U was used to get constant dollars. 

Source: Congressional Budget Office (2003). 

 

In the Hospital Insurance (HI) Program, by contrast, the rate of growth in 

reimbursement is roughly comparable to the growth in enrollee's co-payment costs. 

Consequently, the share of HI costs reimbursed by Medicare was 93 percent in 

1975 and 92 percent in 2003 (Table B-10). Overall, the share of costs reimbursed 

by Medicare has increased slightly. The percentage of costs paid by Medicare for 
B-19 

services covered under Medicare was 82 percent in 1975 and 84 percent in 2003 

(Table B-10). 

 The share of costs paid directly by enrollees is shown in the third panel of 

Table B-11. Total direct costs (excluding premiums) plus Medicare reimbursement 

equals the total or 100 percent. In constant dollars, HI co-payments increased the 

most rapidly between 1975 and 1990. However, between 1990 and 2003, 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-12 for deductible amounts and monthly premium amounts 

under Medicare). 

 Enrollees spend a larger share of their income for Medicare's cost sharing and 

premium charges than they did in 1975 (Table B-11). 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 9.0 percent. The percentage 

declined to 6.6 percent in 2000, but rose to 8.4 percent in 2003. 

TABLE B-11 -- ENROLLEE COSTS UNDER MEDICARE, 

SELECTED CALENDAR YEARS 

[Incurred costs per HI or SMI enrollee]

 

1975 1980 1985 1990 1995 2000 2003 

Annual 

Growth 

1975-2003 

(in percent) 

[In Current Dollars] 

HI copayments 34 66 118 186 263 290 326 8.4 

SMI copayments 84 137 248 400 659 857 966 9.1 

Balance-Billing 22 56 87 68 11 6 9 -3.3 

Total direct costs 140 260 453 655 933 1,153 1,300 8.3 

Premium costs 80 110 186 343 553 546 74 8.1 

Total enrollee costs 220 370 639 998 1,486 1,699 2,005 8.2 

Enrollee per capita income1 5,158 8,431 12,767 15,454 16,460 25,732 23,792 5.6 

[In Constant 2003 Dollars] 

HI copayments 111 146 201 261 317 308 326 3.9 

SMI copayments 271 303 424 560 794 913 966 4.6 

Balance-Billing 72 125 149 96 13 7 6 -7.3 

Total direct costs 454 574 773 917 1,124 1,228 1,300 3.8 

Premium costs 261 244 318 481 667 581 704 3.6 

Total enrollee costs 715 818 1,091 1,398 1,791 1,809 2,005 3.8 

Enrollee per capita income1 16,721 18,628 21,799 21,646 19,837 27,402 23,792 1.3 

 [Percent of Costs Under Medicare Paid by Enrollees, by Source of Payment] 

HI copayments 4.4 4.3 4.2 4.7 4.5 4.3 4.0 -0.3 

SMI copayments 10.7 8.9 8.9 10.2 11.2 12.6 11.8 0.4 

Balance-Billing 2.8 3.7 3.1 1.7 0.2 0.1 0.1 -11.1 

Total direct costs 17.9 16.8 16.3 16.7 15.8 16.9 15.9 -0.4 

Premium costs 10.3 7.1 6.7 8.8 9.4 8.0 8.6 -0.6 
B-20 

TABLE B-11 -- ENROLLEE COSTS UNDER MEDICARE, 

SELECTED CALENDAR YEARS-continued 

[Incurred costs per HI or SMI enrollee] 

1975 1980 1985 1990 1995 2000 2003 

Annual 

Growth 

1975-2003 

(in percent) 

Total enrollee costs 28.2 24.0 23.0 25.4 25.2 25.0 24.5 -0.5 

Enrollee-Paid Costs as a 

Percent of Enrollee Per Capita 

Income1

4.3 4.4 5.0 6.5 9.0 6.6 8.4 2.5 

1

 Tabulated from the Current Population Survey and other statistics of income data. 

Note- Values after 2000 are projected. The CPI-U was used to get constant dollars. 

Source: Congressional Budget Office (2003). 

TABLE B-12 -- COPAYMENT AND PREMIUM VALUES UNDER 

MEDICARE, SELECTED CALENDAR YEARS 1975-2003 

 

1975 1980 1985 1990 1995 2000 2003 

Annual 

Growth 

1975-2003 

(in percent) 

[In Current Dollars] 

Hospital Insurance 

Hospital deductible 92 180 400 592 716 776 840 8.2 

Supplementary Medical 

Insurance 

Annual deductible 60 60 75 75 100 100 100 1.8 

Monthly premium1 6.70 9.20 15.50 28.60 46.10 45.50 58.70 8.1 

[In Constant 2003 Dollars] 

Hospital Insurance 

Hospital deductible 298 398 683 829 863 826 840 3.8 

Supplementary Medical 

Insurance 

Annual deductible 195 133 128 105 121 106 100 -2.3 

Monthly premium1 21.72 20.33 26.46 40.06 55.56 48.45 58.70 3.6 1 The 1980 SMI monthly premium amount is the average of values for the first and second halves of 

the year. 

Note- Values after 2000 are projected. The CPI-U was used to get constant dollars. 

Source: Congressional Budget Office (2003). 

HEALTH CARE EXPENDITURES OF MEDICARE BENEFICIARIES 

Personal health care spending for Medicare beneficiaries totaled $10,250 per 

person in 2000 (Table B-13). The figure was higher for the disabled - $13,247 per 

capita- than for the aged - $9,784 per capita. 

Chart B-1 shows that spending by public payers accounted for 63.6 percent 

of spending for the Medicare population in 2000. Medicare, both fee-for-service 

and managed care, accounted for 50.3 percent, Medicaid 12.4 percent and the 

Department of Veterans Affairs 0.9 percent. Private spending accounted for 36.4 

percent of total spending. Out-of-pocket spending by beneficiaries represented the 
B-21 

most significant portion of private spending. In fact, out-of-pocket spending by 

beneficiaries accounted to close to one fifth of total spending, Chart B-1. 

TABLE B-13 -- PER CAPITA DISTRIBUTION OF TOTAL HEALTH 

EXPENDITURES OF MEDICARE BENEFICIARIES BY PAYER, 2000 

 

All 

 ($) 

Aged 

($) 

Disabled 

($) 

All 

(In percent)

Aged 

(In percent)

Disabled 

(In percent) 

Total $10,250 $9,784 $13,247 100.0 100.0 100.0 

Out-of-pocket 2,018 2,065 1,719 19.7 21.1 13.0 

Private HMO 235 146 801 2.3 1.5 6.1 

Private ins employer 710 658 1,041 6.9 6.7 7.9 

Private ins individual 288 317 96 2.8 3.2 0.7 

Private ins unknown 43 49 0 0.4 0.5 0.0 

Other 305 168 1,187 3.0 1.7 9.0 

Uncollected Liability 135 128 178 1.3 1.3 1.3 

Medicare 4,438 4,365 4,908 43.3 44.6 37.0 

Medicare HMO 714 762 402 7.0 7.8 3.0 

Medicaid 1,270 1,035 2,776 12.4 10.6 21.0 

VA 97 90 137 0.9 0.9 1.0 

Note- Percentages may not sum to 100 due to rounding. 

Source: CRS Calculations based on 2000 Medicare Current Beneficiary Survey. 

CHART B-1--DISTRIBUTION OF EXPENDITURES OF ALL 

MEDICARE BENEFICIARIES BY PAYER, 2000 

Note-Percentages may not sum due to rounding. 

Source: Congressional Research Service, based on the 2000 Medicare Current Beneficiary Survey. 

Out-of-pocket

19.7%

Private HMO

2.3%

Private ins employer

6.9%

Private ins individual

2.8%

Private ins unknown

0.4%

Medicare HMO

7.0%

Medicaid

12.4%

VA

0.9%

Other

3.0%

Uncollected Liability

1.3%

Medicare

Public 43.3%

Payers

63.6%

Out-of-pocket

19.7%

Private HMO

2.3%

Private ins employer

6.9%

Private ins individual

2.8%

Private ins unknown

0.4%

Medicare HMO

7.0%

Medicaid

12.4%

VA

0.9%

Other

3.0%

Uncollected Liability

1.3%

Medicare

Public 43.3%

Payers

63.6%
B-22 

CHART B-2--DISTRIBUTION OF EXPENDITURES BY PAYER, TOTAL, 

AGED, AND DISABLED MEDICARE BENEFICIARIES, 2000 

0.197 0.211

0.130

0.069 0.067

0.079

0.028 0.032

0.433 0.446

0.370

0.106

0.210

0.023 0.015

0.061

0.007

0.000

0.004 0.005

0.030 0.017

0.090

0.013 0.013 0.013

0.070 0.078

0.030

0.124

0.010 0.009 0.009

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All (%) Aged (%) Disabled (%)

VA

Medicaid

Medicare HMO

Medicare

Uncollected Liability

Other

Private ins unknown

Private ins individual

Private ins employer

Private HMO

Out-of-pocket

Note-Percentages may not sum due to rounding. 

Source: Congressional Research Service, based on the 2000 Medicare Current Beneficiary Survey. 

The contribution of different payer groups to total spending showed different 

patterns for the aged and disabled (Table B-13 and Chart B-2). While Medicare 

accounted for 52 percent of total spending for the aged, it represented only 

40 percent of total spending for the disabled. Medicaid picked up almost twice as 

much of the costs for the disabled as for the aged (21 percent versus 11 percent). 
B-23 

Out-of-pocket costs accounted for 21 percent of total spending for the aged but only 

13 percent for the disabled. Other private spending by insurers and managed care 

plans represented only 15 percent of total spending for the aged but 25 percent for 

the disabled. Spending by the Department of Veterans Affairs was comparable for 

both groups (1 percent of the total). 

PROJECTED DRUG SPENDING 

The Congressional Budget Office (CBO) has projected drug spending for 

Medicare beneficiaries for drugs not covered by the program. This includes 

spending by supplemental plans as well as beneficiaries’ out-of-pocket costs. In 

March 2003, the estimate for the CY2003-2012 period was $1.6 trillion. (Any new 

Medicare benefit would pick up a portion of these costs.) 

Over the CY2003-2012 period, median spending was estimated to increase 

from $1,390 in 2003 to $3,439 by 2013. Over the same 10-year period, mean 

spending was estimated to increase from $2,318 to $5,727. (Mean spending is 

higher than median spending because mean spending is highly influenced by the 

relatively small portion of the population with very high drug costs.) Projection 

increases in per capita spending over the period reflect a number of factors 

including price increases, utilization changes, and the inclusion of two high cost 

years (2011 and 2012, the first years when the baby boom generation becomes 

eligible for Medicare). 

Drug spending is very unevenly distributed across Medicare beneficiaries. A 

relatively small proportion of the population accounts for a relatively large portion 

of total spending. CBO estimates that (excluding M+C enrollees), 10.3 percent of 

beneficiaries will have no drug spending in 2003. Slightly more than half 

(51 percent) of total drug spending will be for the 15.8 percent of the population 

spending $4,000 or more in the year. Approximately 31.7 percent of spending will 

be for the 7 percent of the population spending $6,000 or more in the year (see 

Table B-14). 

TABLE B-14--ESTIMATED DISTRIBUTION OF MEDICARE 

BENEFICIARIES AND AMOUNT SPENT ON OUTPATIENT 

PRESCRIPTION DRUGS, 2003 

Spending category Percent of beneficiaries Percent of total dollars 

Zero 10.3 0.0 

Greater than zero 89.7 100.0 

$500 or greater 71.4 98.1 

$1,000 or greater 58.3 93.8 

$2,000 or greater 38.4 80.3 

$3,000 or greater 24.8 65.2 

$4,000 or greater 15.8 51.0 

$5,000 or greater 10.2 39.7 

$6,000 or greater 7.0 31.7 

$7,000 or greater 5.1 26.0 

$8,000 or greater 3.9 21.9 
B-24 

 

TABLE B-14--ESTIMATED DISTRIBUTION OF MEDICARE 

BENEFICIARIES AND AMOUNT SPENT ON OUTPATIENT 

PRESCRIPTION DRUGS, 2003-continued

Spending category Percent of beneficiaries Percent of total dollars 

$9,000 or greater 2.8 17.6 

$10,000 or greater 2.0 14.5 

$11,000 or greater 1.6 12.3 

$12,000 or greater 1.1 10.0 

Source: U.S. Congressional Budget Office. Estimates using March 2003 baseline projections. 

Estimates based on data from the 2000 MCBS with adjustments to account for underreporting by 

community respondents and for non-response by nursing home residents. March 2003. 

LONG-TERM CARE FOR PERSONS WITH DISABILITIES

OVERVIEW 

Long-term care refers to a wide range of supportive and health services for 

persons who have lost the capacity for self-care due to illness or frailty. Chronic 

illness or conditions often result in both functional impairment and physical 

dependence on others for an extended period of time. Major groups of persons 

needing long-term care services and supports include the elderly as well as younger 

persons with disabilities, including persons with developmental disabilities, 

physical disabilities, and mental illness. The likelihood of needing long-term care 

assistance occurs more frequently with advancing age. However, advances in 

medical care are enabling persons of all ages with disabilities to live longer. The 

demand for long-term care services is expected to increase as the population ages. 

The presence of a chronic illness or condition alone does not necessarily 

result in a need for long-term care services. For many individuals, an illness or a 

chronic condition does not result in functional impairment or dependence and they 

are able to conduct daily routines without assistance. When the illness or condition 

results in a functional or activity limitation, long-term care services may be 

required. The range of chronic illnesses and conditions resulting in the need for 

long-term care services and supports is extensive. Unlike acute medical illnesses 

which may be solved in a relatively short period of time, chronic conditions last for 

an extended period of time and are not typically curable. 

Long-term care services include a continuum of health and social services 

provided in institutions, in the community and at home. However, the predominant 

source of long-term care support for persons with disabilities is through informal 

support services provided by unpaid family and friends. Despite the enormous 

amount of care provided by informal sources, long-term care spending - over $151 

billion in 2001 - represents more than 12 percent of all personal health care 

spending. 

The long-term care system is comprised of multiple types of providers 

financed by a myriad of federal health and social service programs primarily, but 

also income assistance and housing support programs to a lesser extent. The 
B-25 

 

principal source of public support for long-term care is the Medicaid program, 

chiefly through its coverage of nursing home care. Over the years, federal and state 

policymakers have devoted efforts to expand home and community-based long-term 

care services that most people prefer over institutional care. A significant Supreme 

Court decision in 1999 (Olmstead v. L.C.) has sharpened federal policy attention on 

federal and state programs that provide this care. The private long-term care 

insurance market is a growing option to provide protection against the high cost of 

long-term care for some people. 

This Appendix presents an overview of long-term care, including information 

on current recipients, future need, providers, federal programs and the private longterm care insurance market. 

Measuring the Need for Long-Term Care 

The need for long-term care assistance is measured by assessing a person=s 

need for assistance with activities of daily living (ADLs) and/or instrumental 

activities of daily living (IADLs). ADLs are activities necessary to carry out basic 

human functions, and include the following: bathing, dressing, eating, getting 

around inside the home, toileting, and transferring from a bed to a chair. IADLs are 

tasks necessary for independent community living, and include the following: 

shopping, light housework, laundry, taking medication, telephoning, money 

management, and meal preparation. IADLs are sometimes used to measure a 

person=s need for assistance as a result of mental or cognitive disabilities as well as 

physical disabilities. 

Recipients of Long-Term Care 

About nine million persons over age 18 received long-term care assistance, 

either in community settings or in nursing homes. This includes 5.5 million persons 

aged 65 and older (in 1999) and 3.5 million persons aged 18-64 (in 1994) (61 

percent and 39 percent of the total, respectively) (see Tables B-15 and B-16).4

 

The vast majority of adults who receive long-term care assistance reside in 

the community, not in institutions. About 7.2 million persons aged 18 and older 

received long-term care assistance in community settings, representing over 

80 percent of all persons receiving assistance. Of all persons receiving assistance in 

the community, just over half are aged 65 and older, and about 47 percent are age 

18-64. 

Less than 5 percent of persons aged 65 and older - just under 1.7 million 

persons B received care in institutions in 1999. Less than one-tenth of one percent 

of persons age 18-64 received care in nursing homes in 1994 - about 138,000 

persons (see Tables B-15 and B-16). About another 400,000 persons receive care in 

residential care facilities for persons with mental retardation or developmental 

disabilities or mental illness (Spector, Pezzin, and Spillman). 

4

 Estimate based on data from the 1999 National Long-Term Care Survey (for persons aged 65 and older; 

and the 1994 National Health Interview Survey and the 1996 Medical Expenditure Panel Survey (for 

persons aged 18-64). 
B-26 

The likelihood of receiving long-term care assistance increases dramatically 

with age. However, while use of nursing home care occurs more frequently as a 

person ages, regardless of age, in 1999, most older people received long-term care 

assistance in community settings rather than in nursing homes, even those 85-94. It 

is only among the very old - those persons aged 95 and older - that persons have 

about an equal chance of being cared for in an institution or in the community (see 

Table B-15). 

TABLE B-15--PERSONS AGED 65 AND OLDER RECEIVING LONGTERM CARE SERVICES, 1999 

[Population in Thousands] 

Characteristics of 

persons aged 65 

and older 

Persons aged 

65 or older 

Percent receiving 

long-term care1

Percent receiving 

long-term care in 

the community2

Percent receiving 

long-term care in 

institutions3

Number 34,459 5,479 3,824 1,654 

Percent 100.0 15.9 11.1 4.8 

Age 

65-69 9,443 5.7 5.0 0.7 

70-74 8,785 8.8 7.2 1.7 

75-79 7,305 13.6 10.1 3.5 

80-84 4,797 24.8 17.3 7.4 

85-89 2,601 39.8 24.8 15.0 

90-94 1,133 59.8 33.7 26.1 

95 years and older 396 72.1 35.7 36.4 

Gender 

Women 20,200 18.8 12.8 6.0 

Men 14,260 11.9 8.8 3.1 

Race 

White 30,367 15.6 10.6 5.0 

Black 2,869 20.8 16.6 4.2 

Other 1,223 12.5 10.7 1.8 

Marital Status 

Married 17,990 9.7 8.3 1.4 

Widowed 12,020 24.8 15.7 9.1 

Never Married 1,293 23.5 12.1 11.5 

Other 3,157 14.9 9.4 5.5 

1 Receipt of long-term care is defined as receiving human assistance or standby help with at least one 

of six ADLs or being unable to perform at least one of eight IADLs without help. The ADLs included 

are eating, transferring, toileting, getting around inside, dressing, and bathing. The IADLs are meal 

preparation, grocery shopping, light housework, laundry, financial management, taking medication, 

telephoning, and getting around outside. 

2

 This does not include about 1.3 million persons with disabilities who do not receive chronic help, 

but use special equipment to manage their disabilities. 

3

 This includes about 1.5 million persons in nursing homes and slightly more than 150,000 

persons in other care facilities. 

Source: Unpublished tabulations of the 1999 National Long-Term Care Survey by Brenda C. 

Spillman. The Urban Institute, 2003. 
B-27 

Future Need for Long-Term Care 

While some research shows that the incidence of disability among the older 

population has decreased over time, the sheer numbers of older persons in the future 

will strain private and public resources devoted to long-term care. The increasing 

numbers of older persons, especially those who are in the oldest age categories will 

affect public and private financing for care and demand for services from long-term 

care service providers. The growth in the older population will also affect 

caregiving demands on families who are the primary source of long-term care 

assistance. 

Experts predict that in the coming decades long-term care services will be in 

greater demand due to increased numbers of older persons, especially those in the 

oldest age categories. After 2011, the rate of growth for the population age 65 and 

older will considerably outpace the growth of the rest of the nation, and at its peak 

the elderly population will be growing eight-times faster than the population under 

age 65. This growth will lead to significantly higher ratios of elderly to non-elderly 

in the future. Chart B-3 shows the percent increase in the number of the elderly for 

each year from 2001-2030 compared to the change in the population under 65. The 

large increase in the elderly population in 2011 will present challenges for families. 

TABLE B-16--PERSONS AGE 18-64 RECEIVING LONG-TERM CARE 

SERVICES, 1994 

[Population in thousands]

Population age 18-64 not receiving long-term care assistance 155,200 100.0% 

Persons age 18-64 receiving long-term care assistance1 3,502 2.26% 

Persons age 18-64 receiving long-term care in the community 3,364 2.17% 

Persons age 18-64 receiving long-term care in nursing homes2 138 0.09% 1

Receipt of long-term care is defined as receipt of human help for ADLs and IADLs, including 

reminders and standby help, due to a physical, mental, or emotional problem. ADLS include 

bathing, dressing, getting around inside, transferring, toileting, and eating. IADLs include 

shopping, light housework, telephone, money management and meal preparation. 2

The number of persons in nursing homes does not include about 0.4 million persons in 

intermediate care facilities for the mentally retarded (ICFs/MR) and State mental hospitals. 

Source: William Spector, et al. Characteristics of Long-Term Care Users. Prepared for the 

Institute on Medicine, 1998. For persons receiving services in the community, the 1994 National 

Health Interview Survey, Disability Supplement. For persons receiving care in nursing homes, 

the 1996 Medical Expenditure Panel Survey Nursing Home Component. 

 In 2010, just before the first of the baby-boom generation (those born in 

1946) turns 65, the U.S. Census Bureau projects that 13.2 percent of the U.S. 

population will be 65 and over; by 2030, when the last of the baby-boom generation 

(those born in 1964) will already have turned 65, 20 percent of the population will 

be 65 and older. Between 2000 and 2030, the number of persons 65 and older will 

more than double, from 35 million to more than 70 million persons. Furthermore, 

in 2030, 33 million of those people will be 75 and older, and almost 9 million will 

be 85 and older (see Table B-17). 
B-28 

CHART B-3--PROJECTED RATE OF GROWTH FROM PREVIOUS YEAR 

FOR SELECTED POPULATIONS IN THE UNITED STATES, 2001-2030 

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

200120032005200720092011201320152017201920212023202520272029

65 and over Under 65

2011:ThefirstoftheBabyBoomgeneration(thosebornin1946)turns65

2011 – The first of the Baby Boom generation, those born in 1946, turn 65. 

Source: Congressional Research Service (CRS) calculations based on data from the U.S. 

Census Bureau, State Population Projections: Every Fifth Year. 1996; available on-line at: 

[http://www.census.gov/population/www/projections/st_yrby5.html]. 

TABLE B-17--ELDERLY POPULATION AS A PERCENT OF TOTAL 

POPULATION IN THE UNITED STATES, 2030 

2030 

Age group Number 

(in millions) Percent of population 

Percent increase 

2000 to 2030 

65+ 70.3 20.0 101.9 

65-74 37.7 10.7 107.4 

75-84 23.7 6.7 91.9 

85+ 8.9 2.5 107.1 

Under 65 280.8 80.0 16.8 

Total population 351.1 100.0 27.5 

Source: Congressional Research Service (CRS) calculations based on data from the U.S. Census 

Bureau, State Population Projections: Every Fifth Year. 1996; available on-line at: 

[http://www.census.gov/population/www/projections/st_yrby5.html].
B-29 

 The number of persons with disabilities will grow as the population ages. 

According to data prepared for the Department of Health and Human Services 

(DHHS), the number of persons receiving long-term care assistance will increase by 

over 80 percent from 2005-2035. Users of institutional care (nursing facilities and 

alternative living facilities, such as assisted living facilities) age 65 and older are 

estimated to increase by about 70 percent over this same period. Users of home care 

services are estimated to increase by 85 percent (see Table B-18). The number of 

persons aged 65 and older with at least two or more ADLs is estimated to increase 

by over 30 percent from 2000-04 to 2030-34. 

TABLE B-18--PROJECTED GROWTH IN THE LONG-TERM CARE 

POPULATION, AGE 65 AND OLDER, 2005-20351

Year Total number of persons age 

65 and older receiving care 

Number of persons age 65 

and older receiving home and 

community-based care 

Number of persons age 65 

and older receiving 

institutional care 

2005 7.3 5.2 2.1 

2015 8.8 6.5 2.3 

2025 11.2 8.2 3.0 

2035 13.2 9.6 3.6 

1

Projected number of persons receiving paid care throughout the year. Public policies are assumed 

to remain constant. 

Source: The Long-Term Care Financing Model. Prepared by The Lewin Group, Inc. for DHHS, 

Office of the Assistant Secretary for Planning and Evaluation, 2000. 

PROVIDERS OF LONG-TERM CARE 

 The primary source of long-term care assistance is from informal caregivers – 

families and friends of persons with disabilities who provide care and assistance 

without compensation. Estimates of the number of caregivers to persons of all ages 

receiving long-term care assistance range from 7 million to 54 million persons, 

depending upon the population served and the amount and intensity of care 

provided. Research has shown that while adults of all ages provide long-term care 

assistance, persons in middle to late middle age are most likely to be caregivers. 

While women are most likely to be in the caregiver role, both men and women 

provide care. In addition, caregivers often have competing demands – about onehalf are employed and one-third have minor children in the home (Administration 

on Aging, August 2002). 

Informal Care Provided by Families and Friends 

 Of the 3.9 million persons5

 aged 65 and older who received long-term care 

assistance in the community in 1994, nearly 60 percent relied exclusively on unpaid 

caregivers, primarily spouses and children. Only 7 percent relied exclusively on 

 

5

 Total number of persons receiving care in the community differs slightly from number in Table B-17 

due to differences in year of data collection. 
B-30 

paid services; slightly more than a third relied on a combination of paid and unpaid 

care. Of the 3.4 million persons aged 18-64 who received assistance in the 

community, nearly three-quarters of persons relied exclusively on unpaid 

caregivers. Only 6 percent relied exclusively on paid services (see Table B-19). 

TABLE B-19--TYPE OF CARE RECEIVED BY PERSONS AGED 18 AND 

OVER LIVING IN THE COMMUNITY, 1994 

Persons receiving long-term 

care assistance in the 

community 

Persons age 18 – 64 Persons age 65 and older 

Total 3.4 million 3.9 million 

Percent receiving care from 

unpaid providers only 71% 57% 

Percent receiving paid care 

only 6% 7% 

Percent receiving unpaid and 

paid care 6% 36% 

Unknown 17% Not applicable 

Source: For persons aged 65 and older: 1994 National Long-Term Care Survey; for persons 18-

64, 1994 National Health Interview Survey, Disability Supplement. William Spector et. al. 

Characteristics of Long-Term Care Users. Prepared for the Institute of Medicine, 1998.

Formal Care Providers

 In addition to the extensive informal care provided by families and friends, 

the long-term care services system includes thousands of formal care providers. 

They range from institutional providers, including nursing homes and residential 

care facilities for persons with mental retardation and developmental disabilities, to 

a variety of agencies and programs that provide a wide array of home and 

community-based services. These services include home health care, personal care, 

homemaker and chore assistance, adult day care services, home-delivered meals, 

transportation, and many others. In addition, assisted living facilities, adult foster 

care homes and other group homes provide both room and board as well as personal 

care and other assistance to persons who have lost the capacity to live 

independently in their own homes because of their need for assistance with ADLs 

or IADLs. 

 The growth in many formal providers has been influenced by the availability 

of federal financing sources. For example, the growth in the nursing home industry 

during the last fifty years has largely been a result of financing available through 

the Medicaid program and, to a lesser extent, the Medicare program. Before then, 

homes for the aged were supported by state-only funds and through private 

resources. On the other hand, home care agencies have a long history of support 

from the private sector through charitable and volunteer organizations, dating from 

the late 19th century. Like nursing homes, growth in the home care industry has 

been influenced by the availability of federal financing under Medicare and 

Medicaid. Adult day care services were modeled after programs that originated in 

Europe, and then were later adopted in the U.S. to fit available financing 
B-31 

mechanisms through the Medicaid, Social Services Block Grant (SSBG), and Older 

Americans Act programs. A relatively new model of care – assisted living – has 

recently become an important component of the formal long-term care system and is 

primarily financed by individuals’ own resources – not through public sources. 

Nursing Homes--While only a small proportion of persons receiving longterm care services reside in nursing homes, the largest proportion of public 

spending on long-term care is for this care. The growth in the nursing home 

industry was influenced by the creation of benefits under the Medicare, but 

especially, the Medicaid programs in 1965. Significant growth in number of 

nursing homes occurred during the 1960s – from 1960 to 1970, the number of 

homes more than doubled, from 9,582 to almost 23,000, and the number of beds 

more than tripled, from 331,000 to more than one million (U.S. Congress. Senate. 

Special Committee on Aging). While the number of homes has fluctuated over the 

years, the number has declined from the 1970 level. In 2003, there are about 1.8 

million beds in more than 16,400 nursing facilities (Centers for Medicare and 

Medicaid Services, May 2003). 

Residential Settings for Persons with Mental Retardation and Developmental 

Disabilities--The early history of services to persons with mental retardation is 

characterized by the development of large state institutions or training schools 

begun during the latter part of the 19th century and continuing through the first part 

of the 20th century. Between 1920 and 1967, institutions quadrupled in size and 

peaked to almost 200,000 individuals nationwide in 165 free-standing stateoperated mental retardation institutional facilities (Braddock, 1998). In 1971, 

federal financing for intermediate care facilities for the mentally retarded 

(ICFs/MR) was authorized under the Medicaid program; states that were able to 

meet the federal requirements governing care for persons with mental retardation in 

ICFs/MR shifted their state-financed facilities to the Medicaid program. Today, 

although some states are still faced with the legacy of large state-operated and statefinanced institutions, a major change has occurred toward care in smaller, 

community-based residences as well as home-based services for this population. In 

2002, there were an estimated 125,415 distinct residential settings for persons with 

developmental disabilities nationwide (Prouty et. al.). 

Home Care-- Home care services comprise a wide array of services designed 

to assist persons with disabilities and the frail elderly to reside in their own homes 

with appropriate health and supportive services. Home care services may include 

nursing, physical, occupational, and speech therapies, social services, case 

management and assessment, personal care, and homemaker/chore services, among 

others. Home care may be provided by agencies certified to participate in the 

Medicare and Medicaid program and area agencies on aging operating under the 

Older Americans Act, as well as other voluntary organizations. In 1997, there were 

an estimated 20,000 agencies that provide home care services (National Association 

for Home Care). 

Adult day care programs--Adult day care programs provide health and social 

services in a group setting on a part-time basis to frail older persons and other 
B-32 

persons with physical, emotional, or mental impairments who require assistance, 

supervision and rehabilitation to restore or maintain optimal functioning. Services 

generally provided in adult day care settings include client assessment, nursing 

services, social services, therapeutic activities, personal care, physical, 

occupational, and speech therapies, nutrition counseling, and transportation to and 

from the center. These programs have grown from a handful of federally-supported 

research and demonstration projects in the late 1960s and early 1970s to more than 

3,400 centers in 2003 (Cox). 

 Assisted Living Facilities--Assisted living facilities are designed for persons 

who need some assistance due to functional or cognitive impairment, but who do 

not need sustained nursing care. In general, these facilities provide room and board, 

personal care and supportive services while also providing some health-related care. 

They have become alternatives to nursing homes and are based on a philosophy that 

values consumer independence and choice. However, unlike nursing homes which 

receive Medicaid and Medicare funding, assisted living facilities are primarily 

financed by residents out of their own resources. It is estimated that there are about 

30,000 assisted living facilities providing care to about one million persons. 

LONG-TERM CARE SPENDING 

 Of the $1.24 trillion spent on all U.S. personal health care services in 2001, 

$151.2 billion, or about 12.2 percent, was spent on long-term care. This amount 

includes spending for institutional care (nursing homes and intermediate care 

facilities for the mentally retarded (ICFs/MR)), and a wide range of home and 

community-based services, such as home health care services, personal care 

services, and adult day care, among others. 

 Long-term care is chiefly financed through the Federal-State Medicaid 

program. Of all U.S. long-term care spending in 2001, the Medicaid program 

financed 48.3 percent, or $73.1 billion. After Medicaid, private out-of-pocket 

spending is the next primary source of funding for long-term care. In 2001, out-ofpocket spending for long-term care was $33.2 billion, representing 22 percent of all 

U. S. spending on long-term care. Medicare plays a relatively smaller role in longterm care than Medicaid and out-of-pocket spending. In 2001, of total long-term 

care spending, Medicare accounted for 14.2 percent (see Chart B-4). 

 The spending in Chart B-4 excludes some other spending for care of persons 

with disabilities. For example, it does not include spending for home and 

community-based services under federal social service programs such as the Social 

Services Block Grant (SSBG) and the Older American Act. It also fails to account 

for spending for supportive housing services financed through the Department of 

Housing and Urban Development (HUD) programs. It also excludes spending for 

state-only funded long-term care programs. 
B-33 

CHART B-4—SOURCES OF LONG-TERM CARE SPENDING, 2001 

Total Long-Term Care Spending = $151.2 Billion

Other

5.9%

Out-of-pocket 

payments

22.0%

Medicaid

48.3%

Medicare

14.2%

Private health 

insurance T 9.6%

Note- Does not include costs of some Federal and State social service and housing programs nor imputed 

value of informal caregiving. 

Source: Chart prepared by CRS based on data from Centers for Medicare and Medicaid Services, Office 

of the Actuary, National Health Statistics Group. 

 In addition to these costs, spending shown in Chart B-2 does not take into 

account the economic value of care provided to persons with disabilities by 

uncompensated informal care providers. The value of informal caregiving is 

estimated to be quite significant. Placing a value on unpaid caregiving hours is 

dependent upon estimates of the number of persons who need help, the cost of 

caregiving, and the number of unpaid hours that are provided. According to one 

analysis, the economic value of informal caregiving to adults in 2000 ranged from 

$140 billion to $389 billion depending upon the number of caregivers 

(24.4-29.2 million), caregiving hours (24-27 billion), and an imputed value of 

hourly wages ($5.15 to $12.46) (Arno, 2002). Another study estimated the imputed 

value of informal caregiving at $168 billion based on 18.7 billion of caregiving 

hours priced at $9 per hour (LaPlante, Harrington, and Kang, 2002). 

FEDERAL PROGRAMS THAT PROVIDE LONG-TERM CARE 

 Many federal programs assist persons needing long-term care services, either 
B-34 

 

directly or indirectly through a range of health and social services, through cash 

assistance, and through tax benefits. While Medicaid is the primary source of public 

financing for long-tem care, other programs, including Medicare, and social service 

programs provide assistance to persons who need long-term care support. No one 

program, however, is designed to support the full range of long-term care services 

needed by persons with disabilities. Eligibility requirements, benefits, and 

reimbursement policies differ among major programs. Many observers indicate that 

these varying features often result in a fragmented and uncoordinated service 

system. 

 Many observers indicate that Federal support for long-term care provides 

more support for institutional care (primarily through Medicaid) than for home and 

community-based care which most people prefer. A significant 1999 Supreme Court 

case (Olmstead v. L.C.) has had important implications for federal and state longterm care programs. In its decision, the Court stipulated that, under certain 

circumstances, institutionalization of persons who could live in community settings, 

and desire to do so, violates the Americans with Disabilities Act (ADA). In the 

case, physicians had determined that two patients living in a state psychiatric 

hospital in Georgia were able to live in community settings. When the State refused 

to transfer them to a less restrictive setting, the patients brought suit under the 

ADA. The Court ruled that the state had violated Title II of ADA which prohibits 

“unjustified isolation” and that it was discriminatory to force someone to remain in 

an institutional setting when (1) treatment professionals determine that a community 

setting is appropriate; (2) the individuals do not oppose the placement; and (3) the 

placement can be reasonably accommodated, taking into consideration the resources 

of the state and needs of other persons with disabilities. The Federal government 

has taken a number of steps to implement the Olmstead decision, including issuance 

of a series of policy guidance letters from DHHS/Centers for Medicare and 

Medicaid Services (CMS) and through an Executive Order issued by President 

Bush in June 2001 (Executive Order).6

 The following briefly describes selected major federal programs. Not 

discussed are a host of other federal programs dealing with other aspects of longterm care, including housing assistance programs through HUD, as well as services 

administered by the Veterans Administration (VA). 

6

 On June 18, 2001, President Bush issued Executive Order 13217, Community-Based Alternatives for 

Individuals with Disabilities, calling for swift implementation of the Olmstead decision. The Executive 

Order states that the Attorney General, and the Secretaries of DHHS, Education, Labor, and Housing and 

Urban Development and the Commissioner of the Social Security Administration shall work 

cooperatively to see that this goal is accomplished (with DHHS as the designated lead agency). The 

order was based on the following justifications: the nation is committed to community-based alternatives 

for individuals with disabilities; the nation seeks to ensure that community-based programs effectively 

foster independence and participation in the community for Americans with disabilities; unjustified 

isolation or segregation of qualified individuals with disabilities through institutionalization is a form of 

disability-based discrimination prohibited by the ADA; and the Federal government must assist states 

and localities to implement the Olmstead decision to ensure that all Americans have the opportunity to 

live close to their families and friends, to live independently, to engage in productive employment, and 

to participate in community life. 
B-35 

 

Medicaid

 The largest single public financing source for long-term care services in the 

nation is the Federal-State Medicaid program. Medicaid is administered by States 

within broad federal guidelines. Medicaid pays for a wide range of long-term care 

services for persons who meet Medicaid’s categorical and financial eligibility 

requirements (see section on Medicaid eligibility). Medicaid covers services in 

nursing facilities, intermediate care facilities for persons with mental retardation 

(ICFs/MR), and a wide range of home and community-based services, including 

case management, home health care, personal care, homemaker services, among 

others. 

Nursing Home Care--Medicaid’s coverage of long-term care is driven 

primarily by its coverage for nursing home care which is the largest component of 

Medicaid long-term care spending. The Social Security Amendments of 1965 

required that states cover skilled nursing facility services and gave these services 

the same level of priority as hospital and physician services. People eligible under 

the State’s Medicaid plan are entitled to nursing home facility care; that is, if a 

person meets the State’s income and asset requirements, as well as the State’s 

functional eligibility requirements for entry into a nursing home, he or she is 

entitled to the benefit. In 2003, there are an estimated 1.6 million nursing home 

beds certified to participate in the Medicaid program (American Health Care 

Association). 

Intermediate Care Facilities for the Mentally Retarded (ICFs/MR)-- 

Institutional care provided to persons with mental retardation and developmental 

disabilities in intermediate care facilities for the mentally retarded (ICFs/MR) is an 

optional benefit under the Medicaid program. All States opt to provide this care 

under Medicaid. Services include room and board and a wide range of specialized 

therapeutic services to assist persons with mental retardation and developmental 

disabilities to function at optimal levels. Medicaid-certified ICFs/MR must offer 

“active treatment”7

 to residents. Federal Medicaid law and regulations govern 

standards of care that ICFs/MR must provide, including staffing and resident care 

requirements and inspection and certification rules. In 2002, there were 6,623 

Medicaid ICFs/MR nationwide serving about 110,600 residents; the average size of 

these facilities was 16.7 residents (Prouty et al.). 

Home Health Care Services--All States are also required to provide home 

health services to persons entitled to nursing facility coverage under a State’s 

Medicaid plan. Home health services are nursing services and home health aide 

services provided on a part-time or intermittent basis to persons who need 

assistance for an illness or condition; services may be provided through home 

7

 Active treatment is defined by regulation as aggressive, consistent implementation of a program of 

specialized and generic training, treatment, health and related services directed toward acquisition of 

behaviors necessary for the client to function with as much self-determination and independence as 

possible, and the prevention or deceleration of regression or loss of optional functional status. (45 CFR 

483.440) 
B-36 

 

health agencies or, under certain circumstances, by a registered nurse. Services also 

include medical supplies, medical equipment and appliances suitable for use in the 

home. States may also choose to provide optional services, such as physical 

therapy, occupational therapy, speech pathology and audiology services. 

Personal Care Services--States have the option to cover personal care 

services for Medicaid beneficiaries who need assistance with ADLs and IADLs. 

Medicaid statute defines personal care as services furnished to an individual at 

home or in another location (excluding hospital, nursing facility or ICF/MR, or 

institution for mental diseases) that are authorized by a physician, at state option, 

otherwise authorized under a plan of care. Services offered under the personal care 

option include assistance with bathing, dressing, eating, toileting, personal hygiene, 

light housework, laundry, meal preparation and grocery shopping. In 2002, 36 

States covered personal care services as part of their state Medicaid plans. 

Home and Community-Based Waiver Program--In 1981 Congress authorized 

expansion of home and community-based services under Medicaid. The program, 

known as the home and community-based waiver program (authorized under 

Section 1915(c) of the Social Security Act) allows the Secretary of the Department 

of Health and Human Services (DHHS) to waive certain statutory requirements to 

assist states in financing care at home and in other community-based settings for 

persons who, without these services, would be in an institution.8

 

 States may choose to cover a range of community-based long-term care 

services for persons of all ages who meet the state’s eligibility requirements. 

Services may include personal care assistance, homemaker/home health aid 

services, personal care assistance, adult day care, case management, and respite for 

caregivers, and habilitation,9

 among others. Spending for the Section 1915(c) 

waiver program has increased rapidly since FY1990 when it was $1.2 billion, 

reaching $16.4 billion in FY2002. 

 The home and community-based waiver program has been a significant 

source of support to care for persons with mental retardation and developmental 

disabilities. In FY2002, about three-quarters of waiver spending was for persons 

with mental retardation and developmental disabilities; the balance was spent on 

other persons with disabilities, including the elderly and persons with physical 

disabilities (Eiken and Burwell). Despite the growth in the waiver programs, many 

States have waiting lists for services, especially for persons with mental retardation 

and developmental disabilities. 

8

 States may waive the following Medicaid requirements: (1) statewideness – States may cover services 

in only a portion of the State, rather than in all geographic jurisdictions; and (2) comparability of 

services – States may cover State-selected groups of persons, rather than all persons otherwise eligible. 

In addition to waiving these requirements, States may use more liberal income requirements than would 

ordinarily apply to persons living in the community. That is, they may use the eligibility standard used to 

determine financial eligibility for nursing home care – income up to 300 percent of the SSI level ($1,656 

in 2003). 

9

 Habilitation refers to services to assist individuals in developing skills necessary to reside successfully 

in home and community-based settings. It includes such activities as prevocational, educational, and 

supported employment. 
B-37 

 In January 2000, and in subsequent policy memoranda DHHS issued 

guidance to states in the implementation of the Olmstead decision as it relates to 

Medicaid home and community-based programs. (Centers for Medicare and 

Medicaid Services, January 2000) Specifically, DHHS indicated that Olmstead

applied to all persons with disabilities and to persons already in institutional 

settings as well as those being assessed for institutionalization. Furthermore, 

DHHS recommended that States take a number of actions, including development 

of comprehensive plans to strengthen community service systems and serve persons 

with disabilities in the most integrated setting appropriate to their needs. 

 (For more information on Section 1915(c) waiver programs see the section on 

Medicaid.) 

Medicaid Long-Term Care Spending

 In FY2002, Medicaid spent $82 billion on long-term care services – 

representing more than one-third of all Medicaid spending (see Table B-20). In 

FY2002, of total Medicaid long-term care services, most – 70 percent or $57.4 

billion – was spent for care in institutions. Of the $57.4 billion spent for 

institutions, slightly more than 80 percent was spent for care in nursing facilities, 

with the balance for care in ICFs/MR. 

 While overall long-term care spending increased by 178 percent over the 

period, the proportion of Medicaid funds spent on long-term care declined from 42 

percent in FY1990 to slightly more than 35 percent in FY2002. This decline in the 

proportion of total spending used for long-term care services is influenced by a 

number of factors. These include, for example, the increased share of Medicaid 

spending for other services, such as prescription drugs, and changes in enrollment 

patterns. 

 The downward shift in the overall proportion spent for long-term care is also 

influenced by the changing patterns of long-term care service utilization. Despite 

the large proportion of funds for institutional care, over the last 12 years, there has 

been a shift in how Medicaid funds are used for long-term care. From FY1990 to 

FY2002, the proportion of Medicaid long-term care spending devoted to 

institutional care declined. In FY1990, almost 87 percent of long-term care 

spending was devoted to institutional care; in FY2002, it had declined to just over 

70 percent (see Table B-20). This is in part due to a decreasing share of institutional 

spending used for care in ICFs/MR as states have made greater use of home and 

community-based waiver funds to serve persons with mental retardation and 

developmental disabilities. 

 In general, there has been a rather large shift in spending toward home and 

community-based care over this period. In FY1990, slightly more than 13 percent 

of Medicaid long-term care spending was for home and community-based care; in 

FY2002, this proportion had increased to about 30 percent. This shift is primarily 

due to increased spending on home and community-based services under the 

Section 1915(c) waiver program which represented almost one-fifth of Medicaid 

long-term care spending in FY2002 (see Table B-20). 
B-38 

TABLE B-20--MEDICAID LONG-TERM CARE SPENDING, SELECTED 

FISCAL YEARS 1990-2002 

Measure 1990 1995 2000 2002 

Total Medicaid spending (in billions) $69.7 $151.4 $194.3 $243.5 

Total long-term care spending (in billions) $29.5 $49.4 $68.4 $82.1 

Long-term care spending as a percent of 

Medicaid spending 42.4% 32.6% 35.2% 35.1% 

Institutional care spending as a percent of longterm care spending 86.7% 80.8% 72.5% 70.5% 

Nursing home spending as a percent of longterm care spending 60.9% 61.4% 57.9% 56.8% 

ICF/MR1

 spending as a percent of long-term 

care spending 25.8% 19.4% 14.6% 13.7% 

Total home and community-based services 

(HCBS) spending as a percent of long-term care 

spending2

13.3% 19.2% 27.5% 29.5% 

HCBS waivers spending as a percent of longterm care spending 4.2% 9.4% 18.5% 19.1% 

1

Intermediate care facilities for persons with mental retardation. 

2

Includes HCBS waivers, home health and personal care services. 

Source: Congressional Research Service (CRS) calculations based on CMS/HCFA 64 data provided 

by The Medstat Group, Inc. for various years. 1990 total Medicaid spending, based on HCFA 64 

data provided by Urban Institute, Washington, D.C. 

Medicare 

 The Medicare program covers skilled nursing home and home health care 

services for persons who need skilled or rehabilitative services of relatively short 

duration. It is not intended to be a primary funding source for long-term care for 

persons who need assistance with chronic conditions. Medicare’s role is limited to 

financing care in skilled nursing facilities (SNFs) (up to 100 days after a 

hospitalization for persons who need continued skilled care), and home health 

services for persons who need skilled nursing care on a part-time or intermittent 

basis, or physical or speech therapies. Of the $21.5 billion Medicare spent on longterm care in 2001, about 54 percent was for skilled nursing facility care, and the 

balance was for home health care services. 

 Skilled Nursing Facility Service--Medicare covers SNF services for 

beneficiaries who require skilled nursing care and/or rehabilitation services 

following a hospitalization of at least 3 consecutive days. A physician must certify 

that the beneficiary needs daily skilled nursing care or other skilled rehabilitation 

services that are related to the hospitalization, and that these services, can only be 

provided on an inpatient basis. Medicare does not cover SNF care for persons who 

need care for chronic conditions or disabilities alone. In 2003, of the almost 1.8 

million nursing facility beds nationwide, about 1.2 million were certified to 

participate in both the Medicare and Medicaid programs, and another 63,000 were 

certified for Medicare only (American Health Care Association). 

Home Health Care Services--Medicare covers home health care services for 
B-39 

beneficiaries who are homebound based on the need for intermittent skilled nursing 

care, physical therapy or speech therapy. Beneficiaries receiving at least one of 

these services may also receive, as covered benefits, home health aide services, 

medical social work services, and occupational therapy. Services provided must be 

medically necessary and carried out under a plan of care prescribed by a physician. 

Medicare’s home health benefit is not intended to cover personal care for persons 

who need care for a chronic condition or disability alone. In 2001, about 

3.5 million persons qualified for Medicare on the basis of disability received care 

from nearly 7,000 Medicare-certified home health agencies (Centers for Medicare 

and Medicaid Services, March 2003). 

Other Federal Programs 

A variety of other Federal programs support long-term care services. 

Primarily these are the Older Americans Act and the SSBG (Title XX of the Social 

Security Act). Both support a variety of home and community-based services, such 

as homemaker and chore services, home-delivered meals services, transportation, 

and other services for persons who have chronic and disabling conditions. While 

total spending under these programs is small compared to Medicaid spending 

devoted to long-term care, in many communities these programs represent an 

important source of support for the frail elderly and other persons with disabilities 

by filling gaps in services not met by Medicaid or Medicare. 

 The Older Americans Act supports a wide variety of services for persons age 

60 and older through state and area agencies authorized under Title III of the Act. A 

majority of its spending for home and community-based long-term care services is 

for home-delivered meals programs. State and area agencies use Title III funds for 

home care, adult day, congregate nutrition services, and transportation among other 

services. In FY2002, Title III spending for home-delivered meals, personal care, 

homemaker, and adult day care services totaled almost $920 million 

(Administration on Aging, 2002). In addition, the National Family Caregiver 

Support program, authorized in 2000, offers assistance to informal caregivers of the 

frail elderly; FY2003 funding is $142 million. 

The SSBG authorizes grants to states for a wide range of services to diverse 

populations, including children and families as well as the elderly and persons with 

disabilities. States are allowed considerable discretion in their support for social 

services as long as services are aimed at achieving a number of goals, including 

preventing or reducing inappropriate institutional care through home and 

community-based care. Under the program, home and community-based long-term 

care services must compete with many other social services for other population 

groups, including children and at risk youth. (In 2001, the largest expenditures 

categories for SSBG services were for child protective services and children’s foster 

care). 

 Many States supplement the Federal Supplemental Security Income (SSI) 

cash welfare payments to low-income elderly and disabled persons to enable them 

to pay for home and community-based services, or to reside in non-medical 
B-40 

residential services, such as board and care homes. In addition, certain programs 

authorized under the Rehabilitation Act of 1973 provide a range of supportive 

services to persons with disabilities to enable them to be employed. The 

Department of Veterans Affairs (DVA) provides a wide range of long-term care 

services to the Nation’s veterans, including nursing home, domiciliary, home health 

care, and assistance to caregivers. Finally, programs administered by HUD support 

limited assistance to persons with disabilities through its Congregate Housing 

Service Programs (CHSP) and Assisted Living Conversion Program (ALCP), and 

through services coordinators who work in multifamily housing projects. 

PRIVATE LONG TERM CARE INSURANCE 

 

 Private long-term care insurance is considered by some to be a promising 

private sector option. This insurance provides persons needing assistance with 

ADLs protection against the high cost of long-term care services without relying on 

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

product, the market has grown rapidly. Since 1987, when the Health Insurance 

Association of America (HIAA) began surveying the industry, the market has 

grown by an average 18 percent per year, reaching more than 700,000 policies sold 

in 2001 by 137 companies (with 80 percent accounted for by the ten largest sellers). 

HIAA reports that at the end of 2001, about 7 in 10 policies sold since 1987 

remained in force (based on 77 percent of all policies sold in the individual and 

group association market as of the end of 2001) (Health Insurance Association of 

America, 2003). 

 Care in a variety of settings may be covered, including nursing facilities or 

assisted living facilities, or the individual's own home through home health, respite 

care for caregivers, homemaker and chore services, and medical equipment, among 

others. Some policies will pay relatives for providing care; others pay only for 

licensed professionals. Eligibility is based on limitations in ADLs. 

 Long-term care policies vary with regard to features. These include criteria to 

qualify for benefits; a waiting (“elimination”) period between the onset of 

qualifying impairments and commencement of payment; dollar limits on payments 

and possible inflation adjustments of the limits; whether payments are a flat daily 

amount regardless of expenses or are paid only as reimbursement for approved

expenditures; and the length of time over which benefits may be paid (such as 

1 year, 3 years, or longer). 

Long-term care insurance policies may be sold to an individual, based on 

that individual's age and health-related factors, or may be sold to a group; they may 

also be employer-sponsored, or be part of a life insurance policy. Of the cumulative 

8.3 million policies sold over the period 1987-2001, 80 percent had been sold to 

individuals or group associations; about 16 percent were employer-sponsored with 

the balance sold as part of life insurance policies (see Table B-21). 

 
B-41 

TABLE B-21--LONG-TERM CARE INSURANCE PRODUCTS BY 

PERCENTAGE OF POLICIES SOLD AND AVERAGE 

AGE OF BUYER 

Long-term care 

product 

Percent of 

companies1 

(n=137) 

Percent of 

policies sold 

1987- December 

2001 

(n=8.26 million )

Percent of 

policies sold in 

2001 (n=732,000)

Average age of 

buyer 

Individual and 

group association 81 80 76 62 

Employersponsored 10 16 24 46 

Long-term care as 

part of a life 

insurance policy 

13 5 NA 66 

1

Totals more than 100 percent because some companies sell their products in more than one type 

of market. 

NA-Not applicable. 

Source: Health Insurance Association of America. Long-Term Care Insurance in 2000-2001. 

Washington. January 2003. 

The age of purchase of policies varies with the type of product purchased. As 

shown in Table B-21, in 2001, the average age of purchase for policies sold in the 

individual and group association market was 62 years; the age of purchase in the 

employer-sponsored market was 46 years, and as part of life insurance was 66 

years. According to HIAA, the average age of purchasers who buy policies in the 

individual market has steadily decreased – decreasing from age 72 in 1990 to 62 in 

2001. 

Individual policies are sold with substantial “underwriting” – meaning the 

carrier requires detailed information regarding one’s medical history – while group 

policies may or may not be sold with full or partial underwriting. Age rating is very 

important because the probability of claims is highly correlated with age. 

Underwriting is used by insurers to protect against the “adverse risk selection” that 

can occur if individuals buy policies when they know or suspect that they may soon 

need to make use of the insurance. 

Affordability of Long-Term Care Insurance

 One of the key issues in considering the role private insurance can play in 

long-term care is affordability, and the price for these insurance policies depends 

greatly on the individual's age at the time he or she first purchases the policy – the 

older the individual, the higher the premiums. Once the policy is purchased, 

premiums generally remain fixed throughout the policyholder's lifetime. Under 

certain circumstances, a carrier may seek approval from state insurance 

commissioners to raise rates for all policyholders (in the same class). An 

unexpected rate increase may affect a policyholder’s desire and ability to continue 

the policy. According to HIAA, however, average premiums reported by leading 

insurers in 2001 had remained fairly constant compared to premiums for leading 
B-42 

companies in 1999.10 

 

TABLE B-22--AVERAGE ANNUAL PREMIUMS FOR LEADING LONG 

TERM CARE INSURANCE SELLERS IN 20011

Age Base With 5% Compounded 

Inflation Protection (IP) 

With Nonforfeiture 

Benefit2

With Inflation Protection 

and Nonforfeiture Benefit 

Coverage amount: $100 daily benefit amount, 4 years of coverage, and a 20-day elimination 

period: 

40 $310 $641 $387 $786 

50 $401 $849 $502 $1,022 

65 $996 $1,726 $1,219 $2,261 

79 $4,180 $5,821 $5,087 $7,002 

Coverage amount: $150 daily benefit amount, 4 years of coverage, and a 90-day elimination 

period: 

40 $396 $834 $498 $1,001 

50 $510 $1,009 $642 $1,369 

65 $1,263 $2,273 $1,554 $2,988 

79 $5,265 $7,588 $6,379 $8,883 1

Eleven insurance sellers were identified as having sold 80 percent of all individual and group 

association long-term care insurance policies in 2001. 

2 A non-forfeiture benefit refers to benefits that return a portion of policyholders’ benefits if they 

drop coverage, commonly through return of premiums or through coverage for a shortened period. 

Source: Health Insurance Association of America. Long-Term Care Insurance in 2000-2001. 

Washington. January 2003. 

 

 The cost of polices varies depending not only upon age of purchase, but also 

policy features. According to an HIAA survey (based on 11 insurance sellers selling 

80 percent of all individual and group association policies in 2001), the average 

annual premium for a policy paying a $100 per day benefit (with a 5 percent 

compounded inflation protection, a 20-day elimination period, and four years of 

coverage) was $849 if purchased at age 50, rising to $1,726 if purchased at age 65 

and $5,821 at age 79 (see Table B-22; based on data from eleven insurance sellers 

having sold 80 percent of all individual and group policies in 2001). 

 Very likely, most people would find this product too expensive if they started 

considering purchase when already retired; others may not be able to afford it while 

still working. Generally speaking, the prime market for long-term care insurance is 

for persons who have average to somewhat above average income levels. At high 

levels of accumulated wealth, individuals can bear the financial risks without 

purchasing insurance. At low levels of wealth, insurance is unaffordable. At 

middle-income levels, many will find insurance desirable, especially if they are 

concerned about providing income or assets for a spouse or passing on their wealth 

to their children. Others may be willing to take the chance of spending down their 

assets to qualify for Medicaid if necessary. 

 

10 Health Insurance Association of America. Long-Term Care Insurance in 2000-2001. Washington. 

January 2003. 
B-43 

Employer-based Group Coverage 

 Affordability could be enhanced if insurance was purchased at group rates by 

individuals still in their working years. Even though most group plans to date have 

not featured employer contributions toward the premiums, some research shows that 

the plans can be as much as 15 to 30 percent less costly than policies purchased 

individually. 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. 

According to the HIAA, employer-based activity has been growing faster than the 

individual market, and accounted for almost one-quarter of policies sold in 2001 

(see Table B-21). These employer- based plans may cover employees, their 

spouses, retirees, parents, and parents-in-law. 

 In 2002, pursuant to the Long Term Care Security Act, P.L. 106-265, the 

federal government became the largest employer to offer group long-term care 

insurance. One of the intended purposes (aside from increasing the attractiveness of 

federal employment) is a possible demonstration effect; that is, encouraging more 

private-sector employers to offer such an insurance plan and ultimately having 

some impact on public spending. Some 20 million people are eligible to participate 

in the federal program, including active and retired federal employees, their spouses 

and some relatives. However, only active employees and their spouses can enroll 

with minimal medical qualification, and these only within two months of being 

hired or during an initial open season in 2002. In that open season, 265,000 

applications were received. The program is administered by a joint venture of 

Metropolitan Life and John Hancock Life for an initial contract period of 7 years. 

Tax Treatment of Long-Term Care Insurance

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

P.L. 104-191) established new rules regarding the tax treatment of long-term care 

insurance and other long-term care expenses, effective January 1, 1997. Qualified 

long-term care insurance is treated as accident and health insurance, and its benefits 

are treated as amounts received for personal injuries and sickness and for 

reimbursement of medical expenses actually incurred. As a consequence, long-term 

care insurance benefits are excluded from the gross income of the taxpayer (that is, 

they are exempt from taxation). The exclusion for insurance benefits paid on a per 

diem or other periodic basis is limited to the greater of (1) $220 a day (in 2003) or 

(2) the cost of long-term care services. 

 Employer contributions to the cost of qualified long-term care insurance 

premiums are excluded from the gross income of the employee. The exclusion does 

not apply to insurance provided through employer-sponsored cafeteria plans or 

flexible spending accounts. 

 Unreimbursed long-term care expenses are allowed as itemized deductions to 

the extent they and other unreimbursed medical expenses exceed 7.5 percent of 

adjusted gross income. Long-term care insurance premiums can be counted as 
B-44 

these expenses subject to age-adjusted limits. In 2003, these limits range from $250 

for persons age 40 or less to $3,130 for persons over age 70. 

 Self-employed individuals are allowed to include long-term care insurance 

premiums in determining their above-the-line deduction (a deduction not limited to 

itemizers) for health insurance expenses. Only amounts not exceeding the ageadjusted limits can be counted. 

 HIPAA also provided definitions for key long-term care insurance terms: 

 Qualified long-term care insurance 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, pledged as collateral for a 

loan, or borrowed; applies all refunds of premiums and all policy holder 

dividends or similar amounts as a reduction in future premiums or to 

increase future benefits; and meets certain consumer protection standards. 

Policies issued before January 1, 1997, and meeting a state’s long-term care 

insurance requirements at the time the policy was issued are considered 

qualified insurance for purposes of favorable tax treatment. 

 Qualified long-term care services are defined as necessary diagnostic, 

preventive, therapeutic, curing, treating, mitigating, and rehabilitative 

services, and maintenance or personal care services, which are required by 

a chronically ill individual, and are provided according to a plan of care 

prescribed by a licensed health care practitioner. However, amounts paid 

for services provided by the spouse of a chronically ill person or by a 

relative directly or through a partnership, corporation, or other entity will 

not be considered a medical expense eligible for favorable tax treatment, 

unless the service is provided by a licensed professional. 

 Chronically ill persons are defined as those individuals: 

(1) unable to perform without substantial assistance from another individual 

at least two of the following six limitations in ADLs for a period of at least 

90 days due to a loss of functional capacity: bathing, dressing, transferring, 

toileting, eating, and continence; 

(2) having a level of disability similar to the level of disability specified for 

functional impairments (as determined by the Secretary of the Treasury in 

consultation with the Secretary of Health and Human Services); or 

(3) requiring substantial supervision to protect them from threats to health 

and safety due to severe cognitive impairment. 

 A qualified long-term care insurance contract must take into account at least 

five of the six ADLs identified above. 

HIPAA required that a licensed health practitioner (physician, registered 

professional nurse, licensed social worker, or other individual prescribed by the 

Secretary of the Treasury) certify that a person meets these criteria within the 

preceding 12-month period. 
B-45 

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