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. 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.