Long-Term Care: Aging Baby Boom Generation Will Increase Demand and Burden on Federal and State Budgets
Published: 2002-03-21T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: As more and more of the baby boomers enter retirement age, spending for Medicare, Medicaid, and Social Security is expected to absorb correspondingly larger shares of federal revenue and crowd out other spending. The aging of the baby boomers will also increase the demand for long-term care and contribute to federal and state budget burdens. The number of disabled elderly who cannot perform daily living activities without assistance is expected to double in the future. Long-term care spending from public and private sources--about $137 billion for persons of all ages in 2000--will rise dramatically as the baby boomers age. Without fundamental financing changes, Medicaid--which pays more than one-third of long-term care expenditures for the elderly--can be expected to remain one of the largest funding sources, straining both federal and state governments.

section_title: Letter
paragraphs: I am pleased to be here today as you discuss the effects of the aging baby  boom generation on the demand for long-term care services and the  challenges that increased demand will bring for federal and state budgets.  In general, the aging of the baby boom generation will lead to a sharp  growth in federal entitlement spending that, absent meaningful reforms,  will represent an unsustainable burden on future generations. As the  estimated 76 million baby boomers born between 1946 and 1964 become  elderly, Medicare, Medicaid, and Social Security will nearly double as a  share of the economy by 2035. We have been able to sustain these  entitlements in the past with low depression-era birth rates and a large  postwar workforce. However, absent substantive reform of entitlement  programs, a rapid escalation of federal spending for Social Security,  Medicare, and Medicaid beginning in less than 10 years from now is  virtually certain to overwhelm the rest of the federal budget.
Most attention has been focused on the need for Social Security and  Medicare reform in order to maintain their viability and ability to meet  programmatic commitments. As I have testified before various  committees, Social Security and Medicare’s Hospital Insurance trust funds  will face cash deficits not long after the first baby boomers are eligible to  retire. While these are important issues, a broader focus should also  include Medicaid, particularly as it involves financing long-term care.  Long-term care includes an array of health, personal care, and supportive  services provided to persons with physical or mental disabilities. It relies  heavily on financing by public payers, especially Medicaid, and has  significant implications for state budgets as well as the federal budget.
My remarks today will focus on (1) the pressure that entitlement spending  for Medicare, Medicaid, and Social Security is expected to exert on the  federal budget in coming decades; (2) how the aging of the baby boom  population will increase the demand for long-term care services; and (3)  how these trends will affect the current and future financing of long-term  care services, particularly in federal and state budgets. I will also highlight  several considerations for any possible reforms of long-term care  financing.
In summary, as more and more of the baby boom generation enters  retirement over the coming decades, entitlement spending for Medicare,  Medicaid, and Social Security is expected to absorb correspondingly larger  shares of federal revenue and threatens to crowd out other spending. The  aging of the baby boomers will also increase the demand for long-term  care and contribute further to federal and state budget burdens. Estimates  suggest the future number of disabled elderly who cannot perform basic  activities of daily living without assistance may be double today’s level.  Current problems with the provision and financing of long-term care could  be exacerbated by the swelling numbers of the baby-boom generation  needing care. These problems include whether individuals with disabilities  receive adequate services, the potential for families to face financially  catastrophic long-term care costs, and the burdens and social costs that  heavy reliance on unpaid care from family members and other informal  caregivers create coupled with possibly fewer caregivers available in  coming generations. Long-term care spending from all public and private  sources, which was about $137 billion for persons of all ages in 2000, will  increase dramatically in the coming decades as the baby boom generation  ages. Spending on long-term care services just for the elderly is projected  to increase at least two-and-a-half times and could nearly quadruple in  constant dollars to $379 billion by 2050, according to some estimates.  Without fundamental financing changes, Medicaid—which pays over one- third of long-term care expenditures for the elderly—can be expected to  remain one of the largest funding sources, straining both federal and state  governments.
In considering any long-term care financing reforms in light of these  anticipated demands for assistance and budgeting stresses, it is important  to keep in mind that long-term care is not just about health care. It also  comprises a variety of services an aged and/or disabled person requires to  maintain quality of life—including housing, transportation, nutrition, and  social support to help maintain independent living. Given the challenges in  providing and paying for these myriad and growing needs, several  considerations for shaping reform proposals include:    determining societal responsibilities;    considering the potential role of social insurance in financing;    encouraging personal preparedness;  recognizing the benefits, burdens, and costs of informal caregiving;    assessing the balance of state and federal responsibilities to ensure  adequate and equitable satisfaction of needs;    adopting effective and efficient implementation and administration of    developing financially sustainable public commitments.
subsections: section_title: Background
paragraphs: Long-term care includes many types of services needed when a person has  a physical or mental disability. Individuals needing long-term care have  varying degrees of difficulty in performing some activities of daily living  without assistance, such as bathing, dressing, toileting, eating, and moving  from one location to another. They may also have trouble with  instrumental activities of daily living, which include such tasks as  preparing food, housekeeping, and handling finances. They may have a  mental impairment, such as Alzheimer’s disease, that necessitates  supervision to avoid harming themselves or others or assistance with tasks  such as taking medications. Although a chronic physical or mental  disability may occur at any age, the older an individual becomes, the more  likely a disability will develop or worsen.
According to the 1999 National Long-Term Care Survey, approximately 7  million elderly had some sort of disability in 1999, including about 1  million needing assistance with at least five activities of daily living.  Assistance takes place in many forms and settings, including institutional  care in nursing homes or assisted living facilities, home care services, and  unpaid care from family members or other informal caregivers. In 1994,  approximately 64 percent of all elderly with a disability relied exclusively  on unpaid care from family or other informal caregivers; even among  elderly with difficulty with five activities of daily living, about 41 percent  relied entirely on unpaid care.
Nationally, spending from all public and private sources for long-term care  for all ages totaled about $137 billion in 2000, accounting for nearly 12  percent of all health care expenditures. Over 60 percent of expenditures  for long-term care services are paid for by public programs, primarily  Medicaid and Medicare. Individuals finance almost one-fourth of these  expenditures out-of-pocket and, less often, private insurers pay for long- term care. Moreover, these expenditures do not include the extensive  reliance on unpaid long-term care provided by family members and other  informal caregivers. Figure 1 shows the major sources financing these  expenditures.
Medicaid, the joint federal-state health-financing program for low-income  individuals, continues to be the largest funding source for long-term care.  Medicaid provides coverage for poor persons and to many individuals who  have become nearly impoverished by “spending down” their assets to  cover the high costs of their long-term care. For example, many elderly  persons become eligible for Medicaid as a result of depleting their assets  to pay for nursing home care that Medicare does not cover. In 2000,  Medicaid paid 45 percent (about $62 billion) of total long-term care  expenditures. States share responsibility with the federal government for  Medicaid, paying on average approximately 43 percent of total Medicaid  costs. Eligibility for Medicaid-covered long-term care services varies  widely among states. Spending also varies across states—for example, in  fiscal year 2000, Medicaid per capita long-term care expenditures ranged  from $73 per year in Nevada to $680 per year in New York. For the  national average in recent years, about 53 to 60 percent of Medicaid long- term care spending has gone toward the elderly. In 2000, nursing home  expenditures dominated Medicaid long-term care expenditures,  accounting for 57 percent of its long-term care spending. Home care  expenditures make up a growing share of Medicaid long-term care  spending as many states use the flexibility available within the Medicaid  program to provide long-term care services in home- and community- based settings. Expenditures for Medicaid home- and community-based  services grew ten-fold from 1990 to 2000—from $1.2 billion to $12.0 billion.
Other significant long-term care financing sources include:  Individuals’ out-of-pocket payments, the second largest payer of long-term  care services, accounted for 23 percent (about $31 billion) of total  expenditures in 2000. The vast majority (80 percent) of these payments  were used for nursing home care.
Medicare spending accounted for 14 percent (about $19 billion) of total  long-term care expenditures in 2000. While Medicare primarily covers  acute care, it also pays for limited stays in post-acute skilled nursing care  facilities and home health care.
Private insurance, which includes both traditional health insurance and  long-term care insurance, accounted for 11 percent (about $15 billion) of  long-term care expenditures in 2000. Less than 10 percent of the elderly  and an even lower percentage of the near elderly (those aged 55 to 64)  have purchased long-term care insurance, although the number of  individuals purchasing long-term care insurance increased during the  1990s.
section_title: Absent Reform, Spending for Medicaid, Medicare, and Social Security Will Put Unsustainable Pressure on the Federal Budget
paragraphs: Before focusing on the increased burden that long-term care will place on  federal and state budgets, it is important to look at the broader budgetary  context. As we look ahead we face an unprecedented demographic  challenge with the aging of the baby boom generation. As the share of the  population 65 and over climbs, federal spending on the elderly will absorb  a larger and ultimately unsustainable share of the federal budget and  economic resources. Federal spending for Medicare, Medicaid, and Social  Security are expected to surge—nearly doubling by 2035—as people live  longer and spend more time in retirement. In addition, advances in  medical technology are likely to keep pushing up the cost of health care.  Moreover, the baby boomers will be followed by relatively fewer workers  to support them in retirement, prompting a relatively smaller employment  base from which to finance these higher costs. Under the 2001 Medicare  trustees’ intermediate estimates, Medicare will double as a share of gross  domestic product (GDP) between 2000 and 2035 (from 2.2 percent to 5.0  percent) and reach 8.5 percent of GDP in 2075. The federal share of  Medicaid as a percent of GDP will grow from today’s 1.3 percent to 3.2  percent in 2035 and reach 6.0 percent in 2075. Under the Social Security  trustees’ intermediate estimates, Social Security spending will grow as a  share of GDP from 4.2 percent to 6.6 percent between 2000 and 2035,  reaching 6.7 percent in 2075. (See fig. 2.) Combined, in 2075 a full one-fifth  of GDP will be devoted to federal spending for these three programs alone.
To move into the future with no changes in federal health and retirement  programs is to envision a very different role for the federal government.  Our long-term budget simulations serve to illustrate the increasing  constraints on federal budgetary flexibility that will be driven by  entitlement spending growth. Assume, for example, that last year’s tax  reductions are made permanent, revenue remains constant thereafter as a  share of GDP, and discretionary spending keeps pace with the economy.  Under these conditions, spending for net interest, Social Security,  Medicare, and Medicaid would consume nearly three-quarters of federal  revenue by 2030. This will leave little room for other federal priorities,  including defense and education. By 2050, total federal revenue would be  insufficient to fund entitlement spending and interest payments. (See fig.  3.)
Beginning about 2010, the share of the population that is age 65 or older  will begin to climb, with profound implications for our society, our  economy, and the financial condition of these entitlement programs. In  particular, both Social Security and the Hospital Insurance portion of  Medicare are largely financed as pay-as-you-go systems in which current  workers’ payroll taxes pay current retirees’ benefits. Therefore, these  programs are directly affected by the relative size of populations of  covered workers and beneficiaries. Historically, this relationship has been  favorable. In the near future, however, the overall worker-to-retiree ratio  will change in ways that threaten the financial solvency and sustainability  of these entitlement programs. In 2000, there were 4.9 working-age  persons (18 to 64 years) per elderly person, but by 2030, this ratio is  projected to decline to 2.8. This decline in the overall worker-to-retiree  ratio will be due to both the surge in retirees brought about by the aging  baby boom generation as well as falling fertility rates, which translate into  relatively fewer workers in the near future.
Social Security’s projected cost increases are due predominantly to the  burgeoning retiree population. Even with the increase in the Social  Security eligibility age to 67, these entitlement costs are anticipated to  increase dramatically in the coming decades as a larger share of the  population becomes eligible for Social Security, and if, as expected,  average longevity increases.
As the baby boom generation retires and the Medicare-eligible population  swells, the imbalance between outlays and revenues will increase  dramatically. Medicare growth rates reflect not only a rapidly increasing  beneficiary population, but also the escalation of health care costs at rates  well exceeding general rates of inflation. While advances in science and  technology have greatly expanded the capabilities of medical science,  disproportionate increases in the use of health services have been fueled  by the lack of effective means to channel patients into consuming, and  providers into offering, only appropriate services. Although Medicare cost  growth had slowed in recent years, in fiscal year 2001 Medicare spending  grew by 10.3 percent and is up 7.8 percent for the first 5 months of fiscal  year 2002.
To obtain a more complete picture of the future health care entitlement  burden, especially as it relates to long-term care, we must also  acknowledge and discuss the important role of Medicaid. Approximately  71 percent of all Medicaid dollars are dedicated to services for the aged,  blind, and disabled individuals, and Medicaid spending is one of the largest  components of most states’ budgets. At the February 2002 National  Governors Association meeting, governors reported that during a time of  fiscal crisis for states, the growth in Medicaid is creating a situation in  which states are faced with either making major cuts in programs or being  forced to raise taxes significantly. Further, in a 2001 survey, 24 states cited  increased costs for nursing homes and home- and community-based  services as among the top factors in Medicaid cost growth. Over the  longer term, the increase in the number of elderly will add considerably to  the strain on federal and state budgets as governments struggle to finance  increased Medicaid spending. In addition, this strain on state Medicaid  budgets may be exacerbated by fluctuations in the business cycle, such as  the recent economic slowdown. State revenues decline during economic  downturns, while the needs of the disabled for assistance remain constant.
section_title: Baby Boom Generation Will Greatly Expand Demand for Long- Term Care
paragraphs: In coming decades, the sheer number of aging baby boomers will swell the  number of elderly with disabilities and the need for services. These  overwhelming numbers offset the slight reductions in the prevalence of  disability among the elderly reported in recent years. In 2000, individuals  aged 65 or older numbered 34.8 million people—12.7 percent of our  nation’s total population. By 2020, that percentage will increase by nearly  one-third to 16.5 percent—one in six Americans—and will represent  nearly 20 million more elderly than there are today. By 2040, the number of  elderly aged 85 years and older—the age group most likely to need long- term care services—is projected to more than triple from about 4 million  to about 14 million (see fig. 4).
It is difficult to precisely predict the future increase in the number of the  elderly with disabilities, given the counterbalancing trends of an increase  in the total number of elderly and a possible continued decrease in the  prevalence of disability. For the past two decades, the number of elderly  with disabilities has remained fairly constant while the percentage of those  with disabilities has fallen between 1 and 2 percent a year. Possible factors  contributing to this decreased prevalence of disability include improved  health care, improved socioeconomic status, and better health behaviors.  The positive benefits of the decreased prevalence of disability, however,  will be overwhelmed by the sheer numbers of aged baby boomers. The  total number of disabled elderly is projected to increase to between one- third and twice current levels, or as high as 12.1 million by 2040.
The increased number of disabled elderly will exacerbate current  problems in the provision and financing of long-term care services.  Approximately one in five adults with long-term care needs and living in  the community reports an inability to receive needed care, such as  assistance in toileting or eating, often with adverse consequences. In  addition, disabled elderly may lack family support or the financial means  to purchase medical services. Long-term care costs can be financially  catastrophic for families. Services, such as nursing home care, are very  expensive; while costs can vary widely, a year in a nursing home typically  costs $50,000 or more, and in some locations can be considerably more.  Because of financial constraints, many elderly rely heavily on unpaid  caregivers, usually family members and friends; overall, the majority of  care received in the community is unpaid. However, in coming decades,  fewer elderly may have the option of unpaid care because a smaller  proportion may have a spouse, adult child, or sibling to provide it. By 2020,  the number of elderly who will be living alone with no living children or  siblings is estimated to reach 1.2 million, almost twice the number without  family support in 1990. In addition, geographic dispersion of families may  further reduce the number of unpaid caregivers available to elderly baby  boomers.
section_title: Spending for Long- Term Care for Elderly Could Nearly Quadruple by 2050
paragraphs: Currently, public and private spending on long-term care is about $137  billion for persons of all ages, and for the elderly alone is projected to  increase two-and-a-half to four times in the next 40 to 50 years—reaching  as much as $379 billion in constant dollars for the elderly alone, according  to one source. (See fig. 5.) Estimates of future spending are imprecise,  however, due to the uncertain effect of several important factors,  including how many elderly will need assistance, the types of care they  will use, and the availability of public and private sources of payment for  care. Absent significant changes in the availability of public and private  payment sources, however, future spending is expected to continue to rely  heavily on public payers, particularly Medicaid, which estimates indicate  pays about 36 to 37 percent of long-term care expenditures for the elderly.
One factor that will affect spending is how many elderly will need  assistance. As I have previously discussed, even with continued decreases  in the prevalence of disability, aging baby boomers are expected to have a  disproportionate effect on the demand for long-term care. Another factor  influencing projected long-term care spending is the type of care that the  baby boom generation will use. Currently, expenditures for nursing home  care greatly exceed those for care provided in other settings. Average  expenditures per elderly person in a nursing home can be about four times  greater than average expenditures for those receiving paid care at home.  The past decade has seen increases in paid home care as well as in  assisted living facilities, a relatively newer and developing type of housing  in which an estimated 400,000 elderly with disabilities resided in 1999. It  is unclear what effect continued growth in paid home care, assisted living  facilities, or other care alternatives may have on future expenditures. Any  increase in the availability of home care may reduce the average cost per  disabled person, but the effect could be offset if there is an increase in the  use of paid home care by persons currently not receiving these services.
Changes in the availability of public and private sources to pay for care  will also affect expenditures. Private long-term care insurance has been  viewed as a possible means of reducing catastrophic financial risk for the  elderly needing long-term care and relieving some of the financial burden  currently falling on public long-term care programs. Increases in private  insurance may lower public expenditures but raise spending overall  because insurance increases individuals’ financial resources when they  become disabled and allows the purchase of additional services. The  number of policies in force remains relatively small despite improvements  in policy offerings and the tax deductibility of premiums. However, as we  have previously testified, questions about the affordability of long-term  care policies and the value of the coverage relative to the premiums  charged have posed barriers to more widespread purchase of these  policies. Further, many baby boomers continue to assume they will never  need such coverage or mistakenly believe that Medicare or their own  private health insurance will provide comprehensive coverage for the  services they need. If private long-term care insurance is expected to play  a larger role in financing future generations’ long-term care needs,  consumers need to be better informed about the costs of long-term care,  the likelihood that they may need these services, and the limits of  coverage through public programs and private health insurance.
With or without increases in the availability of private insurance, Medicaid  and Medicare are expected to continue to pay for the majority of long-term  care services for the elderly in the future. Without fundamental financing  changes, Medicaid can be expected to remain one of the largest funding  sources for long-term care services for aging baby boomers, with Medicaid  expenditures for long-term care for the elderly reaching as high as $132  billion by 2050. As I noted previously, this increasing burden will strain  both federal and state governments.
section_title: Considerations for Reforming Long-Term Care Financing
paragraphs: Given the anticipated increase in demand for long-term care services  resulting from the aging of the baby boom generation, the concerns about  the availability of services, and the expected further stress on federal and  state budgets and individuals’ financial resources, some policymakers and  advocates have called for long-term care financing reforms. As further  deliberation is given to any long-term care financing reforms, I would like  to close by suggesting several considerations for policymakers to keep in  mind.
At the outset, it is important to recognize that long-term care services are  not just another set of traditional health care services. Meeting acute and  chronic health care needs is an important element of caring for aging and  disabled individuals. Long-term care, however, encompasses services  related to maintaining quality of life, preserving individual dignity, and  satisfying preferences in lifestyle for someone with a disability severe  enough to require the assistance of others in everyday activities. Some  long-term care services are akin to other health care services, such as  personal assistance with activities of daily living or monitoring or  supervision to cope with the effect of dementia. Other aspects of long-term  care, such as housing, nutrition, and transportation, are services that all of  us consume daily but become an integral part of long-term care for a  person with a disability. Disabilities can affect housing needs, nutritional  needs, or transportation needs. But, what is more important is that where  one wants to live or what activities one wants to pursue also affects how  needed services can be provided. Providing personal assistance in a  congregate setting such as a nursing home or assisted living facility may  satisfy more of an individual’s needs, be more efficient, and involve more  direct supervision to ensure better quality than when caregivers travel to  individuals’ homes to serve them one on one. Yet, those options may  conflict with a person’s preference to live at home and maintain autonomy  in determining his or her daily activities.
Keeping in mind that policies need to take account of the differences  involved in long-term care, let me offer several considerations as you seek  to shape effective long-term care financing reforms. These include:    Determining societal responsibilities. A fundamental question is how much  the choices of how long-term care needs are met should depend upon an  individual’s own resources or whether society should supplement those  resources to broaden the range of choices. For a person without a  disability requiring long-term care, where to live and what activities to  pursue are lifestyle choices based on individual preferences and  resources. However, for someone with a disability, those lifestyle choices  affect the costs of long-term care services. The individual’s own  resources—including financial resources and the availability of family or  other informal supports—may not be sufficient to preserve some of their  choices and also obtain needed long-term care services.
Societal responsibilities may include maintaining a safety net to satisfy  individual needs for assistance. However, the safety net may not provide a  full range of choices in how those needs are met. Persons who require  assistance multiple times a day and lack family members to provide some  share of this assistance may not be able to have their needs satisfied in  their own homes. The costs of meeting such extensive needs may mean  that sufficient public support is available only in settings such as assisted  living facilities or nursing homes. More extensive public support may be  extended, but decisions to do so should carefully consider affordability in  the context of competing demands for our nation’s resources.
Considering the potential role of social insurance in financing.
Government’s role in many situations has extended beyond providing a  safety net. Sometimes this extended government role has been a result of  efficiencies in having government undertake a function, and in other cases  this role has been a policy choice. Some proposals have recommended  either voluntary or mandatory social insurance to provide long-term care  assistance to broad groups of beneficiaries. In evaluating such proposals,  careful attention needs to be paid to the limits and conditions under which  services will be provided. In addition, who will be eligible and how such a  program will be financed are critical choices. As in defining a safety net, it  is imperative that any option under consideration be thoroughly assessed  for its affordability over the longer term.
Encouraging personal preparedness. Becoming disabled is a risk. Not  everyone will experience disability during his or her lifetime and even  fewer persons will experience a severe disability requiring extensive  assistance. This is the classic situation in which having insurance to  provide additional resources to deal with a possible disability may be  better than relying on personally saving for an event that may never occur.  Insurance allows both persons who eventually will become disabled and  those who will not to use more of their economic resources during their  lifetime and to avoid having to put those resources aside for the possibility  that they may become disabled.
The public sector has two important potential roles in encouraging  personal preparedness. The first is to adequately educate people about the  boundaries between personal and societal responsibilities. Only if the  limits of public support are clear will individuals be likely to take steps to  prepare for a possible disability. Currently, one of the factors contributing  to the lack of preparation for long-term care among the elderly is a  widespread misunderstanding about what services Medicare will cover.  The second public sector role may be to assure the availability of sound  private long-term care insurance policies and possibly to create incentives  for their purchase. Progress has been made in improving the value of  insurance policies through state insurance regulation and strengthening  the requirements for policies qualifying for favorable tax treatment  through the Health Insurance Portability and Accountability Act of 1996.  However, long-term care insurance is still an evolving product, and given  the flux in how long-term care services are delivered, it is important to  monitor whether long-term care insurance regulations need adjustments  to ensure that consumers receive fair value for their premium dollars.
Recognizing the benefits, burdens, and costs of informal caregiving.