Long-term care includes many types of services needed when a person has a physical or mental disability. Individuals needing long-term care may have difficulty performing some activities of daily living (ADL) without assistance, such as bathing, dressing, toileting, eating, and moving from one location to another. They may have mental impairments, such as Alzheimer’s disease, that necessitate supervision to avoid harm to themselves or others or require assistance with tasks such as taking medications. Although a chronic physical or mental disability may occur at any age, the older an individual becomes, the more likely a disabling condition will develop or worsen. Nearly one-seventh of the nation’s current elderly population—an estimated 5.2 million—have a limitation in either ADLs; instrumental activities of daily living (IADL) such as preparing food, doing housekeeping, and handling finances; or both. More than one-third of these people have limitations in two or more ADLs. Long-term care encompasses a wide array of care settings and services, not only institutional care provided by nursing homes for individuals with more extensive care needs but also home and community-based care. Nearly 80 percent of the elderly requiring assistance with ADLs or IADLs live at home or in community-based settings, while more than 20 percent live in nursing homes or other institutions. The majority of long-term care is provided by unpaid family caregivers to elderly individuals living either in their own homes or with their families. However, a growing minority of the elderly receives paid assistance from various sources. For example, state Medicaid programs have increased significantly the number of beneficiaries receiving in-home or community services. In addition, alternatives to nursing home care, such as assisted-living arrangements, are developing that have long-term care services available. Long-term care needs are an especially significant concern for women. Women represent 7 of 10 unpaid caregivers, three-quarters of nursing home residents 65 years and older, and two-thirds of home health care users. Given their longer life expectancies and the fact that married women usually outlive their spouses, many women face a greater risk of needing long-term care by a paid caregiver. The baby boom generation, about 76 million people born between 1946 and 1964, will contribute significantly to the growth in the number of elderly individuals who need long-term care and in the amount of resources required to pay for it. The oldest baby boomers are now in their fifties. In 2011, the first of the baby boomers born in 1946 will turn 65 years old and become eligible for Medicare. The Medicaid program, which pays for many health care services for low-income elderly, including nursing home care, will also begin to be affected. Baby boomers are likely to have a disproportionate effect on the demand for long-term care because more are expected to live to advanced ages, when need is most prevalent. The first baby boomers reach age 85 in 2030. In 2000, individuals aged 65 or older made up 12.7 percent of our nation’s total population. By 2020, that percentage will increase by nearly one- third to 16.5 percent--one in six Americans--and will represent nearly 20 million more seniors than there are today. By 2040, the number of seniors aged 85 years and older will more than triple to 14 million (see fig. 1). long-term care may have increased. Others contend that better treatment and prevention could decrease the time period at the end of life when long-term care is needed. Baby boomers may also have a disproportionate effect on the demand for paid services. Many baby boomers will have fewer options besides paid long-term care providers because a smaller proportion of this generation may have a spouse or adult children to provide unpaid caregiving. This likelihood stems from the geographic dispersion of families and the large percentage of women who work outside the home, which may reduce the number of unpaid caregivers available to elderly baby boomers. In 1999, spending for nursing home and home health care was about $134 billion. Individuals needing care and their families paid for almost 25 percent of these expenditures out-of-pocket, public programs (predominantly Medicaid and Medicare) funded 61 percent, private insurance (including long-term care insurance as well as services paid by traditional health insurance) accounted for about 10 percent, and other private sources paid the remaining 5 percent (see fig. 2). These amounts, however, do not include the many hidden costs of long-term care. For example, they do not include wages lost when an unpaid family caregiver takes time off from work to provide assistance. An estimated 60 percent of the disabled elderly living in communities rely exclusively on their families and other unpaid sources for their care. Medicaid, a joint federal-state health financing program for low-income individuals, continues to be the largest public funding source for long-term care. Within broad federal guidelines, states design and administer Medicaid programs that include coverage for certain mandatory services, such as skilled nursing facility care, and other optional coverage, including home and community-based services. Long-term care services under Medicaid are not limited to adults—about 1 million children with special needs also receive long-term care services from Medicaid. Although most Medicaid long-term care expenditures are for nursing home care, in the last two decades the proportion of expenditures for home and community- based care has increased. By fiscal year 1998, the number of Medicaid recipients receiving home health or home and community-based services was similar to the number of Medicaid recipients receiving nursing facility services. How much service Medicaid provides varies among states, and Medicaid financing can be vulnerable to shifts in state revenues. State Medicaid programs have, by default, become the major form of insurance for long-term care. About two-thirds of nursing home residents in 1998 relied on Medicaid to help pay for their care, but Medicaid provides insurance only after individuals have become nearly impoverished by “spending down” their assets. Medicaid eligibility for many elderly persons results from having become poor as the result of depleting assets to pay for nursing home care, which costs an average of $55,000 per year. must have less than $2,000 in countable assets to become eligible for Medicaid coverage. An overall increase in wealth among the elderly means that a smaller proportion of elderly individuals will initially qualify for Medicaid—and others will need to become impoverished before they qualify. MetLife Mature Market Institute survey, 2000. This survey also found that nursing home costs vary widely by geographic region, from nearly $33,000 per year in Hibbing, Minnesota, to more than $100,000 per year in the Borough of Manhattan in New York City. number and costs of eligible individuals served under Medicaid in home and community-based settings. All states now have home and community- based waivers, and more than 200 waiver programs served more than 450,000 individuals nationwide in fiscal year 1998. Medicaid expenditures for home and community-based waivers increased an average of 29 percent per year from 1988 to 1999, reaching over $10 billion in 1999. The extent of services provided varies considerably among the states. Medicaid per capita expenditures for home care in 1999 ranged from a low of about $8 in Mississippi to a high of nearly $230 in New York. Medicaid is a significant share of state budgets—comprising 20 percent on average. Dependence on state budgets makes Medicaid financing vulnerable to states’ fiscal health. States generally must maintain balanced budgets without deficits, and their revenues often decline in periods of low or negative economic growth. A recent fiscal survey of states showed that about one-half of states are expecting declines in revenue growth for 2001 to 2002, and a few states are reducing current-year appropriations and making other adjustments to maintain balanced budgets. At the same time, one- half of the states estimate that Medicaid spending will exceed their current projections. With declining revenue and increasing Medicaid expenditures, maintaining balanced budgets in states may require constraining Medicaid expenditures, including the large share represented by long-term care services. While Medicare primarily covers acute care, in the early 1990s it also became a de facto payer for some long-term care services. However, as spending for both skilled nursing facility services and home health care became the fastest growing components of Medicare, the Congress in the Balanced Budget Act of 1997 (BBA) introduced new payment systems for nursing facilities and home health providers to control this spending. care costs and therefore limits its nursing home coverage to short-term, post-acute stays of up to 100 days per spell of illness following hospitalization. Medicare nursing home spending increased from $1.7 billion in 1990 to $10.4 billion in 1998 and declined to $9.6 billion in 1999. Since 1989, Medicare became a significant funding source of home care, financing $8.7 billion in care in 1999—or more than one-fourth of the home care purchased for the elderly. Court decisions and legislative changes in coverage essentially transformed the Medicare home health benefit from one focused on patients needing acute, short-term care after hospitalization to one that primarily served chronic, long-term care patients. By 1994, only about one-fourth of home health visits covered by Medicare occurred within 60 days following a hospitalization. As a result, Medicare, on a de facto basis, financed an increasing amount of long-term care through its home health care benefit. Both the number of beneficiaries receiving home health care and the number of visits per user more than doubled from 1989 to 1996. From 1990 to 1997, the average annual growth rate for Medicare home health care spending was 25.2 percent—more than 3 times the growth rate for Medicare spending as a whole. This increase in the use of these services cannot be explained by any increase in the incidence of illness among Medicare beneficiaries. In response to concerns about the growth in spending for Medicare services, including skilled nursing facility and home health services, the BBA included provisions to slow Medicare spending growth.