[Background Material and Data on Programs within the Jurisdiction of the Committee on Ways and Means (Green Book)]
[Appendices]
[Appendix B. Health Status, Insurance, and Expenditures of the Elderly, and Background Data on Long-Term Care]
[From the U.S. Government Printing Office, www.gpo.gov]


[1998 Green Book] APPENDIX B. HEALTH STATUS AND EXPENDITURES OF THE ELDERLY, AND 
                   BACKGROUND DATA ON LONG-TERM CARE

                                CONTENTS

Health Status
Causes of Death for the Elderly
Medicare Reimbursement and Out-of-Pocket Liabilities of the 
        Elderly
Changes in Real Spending Per Medicare Enrollee, 1967-95
Out-of-Pocket Spending by Medicare Beneficiaries
Background Data on Long-Term Care
  The Long-Term Care Population
  Paying for Long-Term Care Services
  Private Long-Term Care Insurance
References

    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. In 1995, total 
spending on long-term care for the elderly was around $91 
billion (Price, 1997). Most persons 65 years or older have some 
form of health insurance. About 97 percent are covered by 
Medicare or Medicaid, and most have supplementary coverage. 
This appendix reports on the health status health care 
expenditures and long-term care insurance of the elderly (see 
section 3 for a discussion of health insurance supplementing 
Medicare coverage).

                             HEALTH STATUS

    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 17.5 years in 1996 (see table B-1). Although 
life expectancy for the general population declined by 0.3 
years in 1993, the first decrease since 1980, the overall trend 
this century has been an upward one. Improvements in life 
expectancy, as measured by declines in mortality rates, have 
been greater for females than for males. Some morbidity 
indicators, such as the incidence of high blood pressure, 
improved among those aged 65-74 years in the 1970s, 1980s and 
early 1990s (see table B-2). However, the proportion of 
overweight seniors seems to be increasing.

       TABLE B-1.--LIFE EXPECTANCY AT BIRTH AND AT 65 YEARS OF AGE BY SEX AND RACE, SELECTED YEARS 1950-96      
                                      [Remaining life expectancy in years]                                      
----------------------------------------------------------------------------------------------------------------
                                                         At birth               At 65 years          At birth   
                                                 ---------------------------------------------------------------
                      Year                         Both                    Both                                 
                                                   sexes   Male   Female   sexes   Male   Female   White   Black
----------------------------------------------------------------------------------------------------------------
1950 \1\........................................    68.2    65.6    71.1    13.9    12.8    15.0    69.1    60.7
1960 \1\........................................    69.7    66.6    73.1    14.3    12.8    15.8    70.6    63.2
1970............................................    70.8    67.1    74.8    15.2    13.1    17.0    71.7    64.1
1980............................................    73.7    70.0    77.4    16.4    14.1    18.3    74.4    68.1
1988............................................    74.9    71.4    78.3    16.9    14.7    18.6    75.6    69.2
1989............................................    75.1    71.7    78.5    17.1    15.0    18.8    75.9    69.2
1990............................................    75.4    71.8    78.8    17.2    15.1    18.9    76.1    69.1
1991............................................    75.5    72.0    78.9    17.4    15.3    19.1    76.3    69.3
1992............................................    75.8    72.3    79.1    17.5    15.4    19.2    76.5    69.6
1993............................................    75.5    72.2    78.8    17.3    15.3    18.9    76.3    69.2
1994............................................    75.7    72.4    79.0    17.4    15.5    19.0    76.5    69.5
1995............................................    75.8    72.5    78.9    17.4    15.6    18.9    76.5    69.6
1996............................................    75.9    72.7    79.0    17.5    15.7    19.0    76.6   69.9 
----------------------------------------------------------------------------------------------------------------
\1\ Includes deaths of nonresidents of the United States in the 1950 and 1960 data.                             
                                                                                                                
 Source: For the years 1950-95, National Center for Health Statistics (1997a, p. 108); for 1996, National Center
  for Health Statistics (1997b).                                                                                


  TABLE B-2.--SELECTED HEALTH STATUS INDICATORS FOR PERSONS 65-74 YEARS OF AGE BY SEX, SELECTED PERIODS 1971-94 
                                             [Percent of population]                                            
----------------------------------------------------------------------------------------------------------------
                                                                       Male                      Female         
                  Health status indicator                  -----------------------------------------------------
                                                            1971-74  1976-80  1988-94  1971-74  1976-80  1988-94
----------------------------------------------------------------------------------------------------------------
Hypertension \1\ \2\......................................     67.2     67.1     57.3     78.3     71.8     60.8
High-risk serum cholesterol levels (Mean serum cholesterol                                                      
 level, \3\ in mg/dL).....................................     34.7                                             
                                                              (226)     31.7                                    
                                                                       (221)     21.9                           
                                                                                (212)     57.7                  
                                                                                         (250)     51.6         
                                                                                                  (246)     41.3
                                                                                                           (233)
Overweight \4\............................................     23.0     25.2     42.9     38.0     38.4    42.3 
----------------------------------------------------------------------------------------------------------------
\1\ Excludes pregnant women.                                                                                    
\2\ 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.                                                                               
\3\ High-risk serum cholesterol levels are defined as greater or equal to 240 mg/dL (6.20 mmol/L), risk level as
  defined by the National Cholesterol Education Program Expert Panel on Detection, Evaluation, and Treatment of 
  High Cholesterol in Adults, November 1987.                                                                    
\4\ Overweight is defined for men as body mass index greater than or equal to 27.8 kilograms/meter \2\, and for 
  women as body mass index greater than or equal to 27.3 milograms/meter \2\. These cut points were used because
  they represent the sex-specific 85th percentiles for persons 20-29 years of age in the 1976-80 National Health
  and Nutrition Examination Survey.                                                                             
                                                                                                                
 Note.--Data are based on physical examinations of a sample of the civilian, noninstitutionalized population.   
                                                                                                                
 Source: National Center for Health Statistics (1997a, pp. 190-92).                                             

    Despite the trend toward improved health status among the 
elderly, their needs for medical and long-term care services 
are substantial and growing. Many of the elderly have one or 
more chronic conditions, many of which give rise to the need 
for continuing health care. Table B-3 shows the incidence of 
several common chronic conditions among the elderly. Half 
report having arthritis, about 36 percent report high blood 
pressure, and over 30 percent report heart disease. The 
incidence of many chronic conditions is directly related to age 
and inversely related to family income.

        TABLE B-3.--SELECTED CHRONIC CONDITIONS PER 1,000 ELDERLY PERSONS BY AGE AND FAMILY INCOME, 1994        
----------------------------------------------------------------------------------------------------------------
                                                     Age                         Family income                  
                                               -----------------------------------------------------------------
          Chronic condition              All             75     Less                                     $35,000
                                       elderly  65-74   and     than   $10,000-$19,999  $20,000-$34,999    and  
                                                        over  $10,000                                      over 
----------------------------------------------------------------------------------------------------------------
Arthritis............................     502     477    537      651          549              509          416
Cataracts............................     166     113    242      243          200              166          135
Hearing impairment...................     286     235    360      287          337              319          274
Deformity or orthopedic impairment...     166     154    182      208          202              165          147
Hernia of abdominal cavity...........      64      63     66       52           64               90           58
Diabetes.............................     101     102    101      134          112               88           80
Heart disease........................     325     281    387      477          307              349          309
High blood pressure \1\..............     364     347    388      525          352              372          326
Emphysema............................      46      47     43       49           51               44          41 
----------------------------------------------------------------------------------------------------------------
\1\ As self-reported in the 1994 National Health Interview Survey; the higher 1988-91 hypertension data in table
  B-2 are from physical examination of a sample population. Overall self-reported hypertension fell between 1991
  and 1994.                                                                                                     
                                                                                                                
 Source: National Center for Health Statistics (1995a, pp. 81-2; 87-90).                                        

    Self-assessed health is a common method used to measure 
health status, with responses ranging from excellent to poor. 
Nearly 72 percent of elderly people living in the community 
describe their health as excellent, very good, or good, 
compared with others their age; only 28 percent report that 
their health is fair or poor (see table B-4).
    Family income is directly related to the elderly people's 
perception of their health. Income level is also strongly 
correlated with morbidity and mortality, lending credibility to 
the use of this measure as an assessment tool (Angell, 1993). 
In 1994, about 49 percent of older people with incomes over 
$35,000 described their health as excellent or very good, 
compared to others their age, while only 29 percent of those 
with low incomes (less than $10,000) reported excellent or very 
good health.
    Surveys on long-term care indicate that rates of chronic 
disability among the elderly have declined significantly 
(Manton, 1997). Some demographers, in looking at the reductions 
in the projected percentage of those 65 and above who are 
disabled, are predicting that older people will not only have 
increasing longevity, but a later life with less dependency 
(Kolata, 1996). It should be noted that living longer seems to 
be the demographic trend, and it is not known what the 
tradeoffs may be in cost of care and quality of life.

                  TABLE B-4.--SELF-ASSESSED HEALTH STATUS OF THE ELDERLY BY FAMILY INCOME, 1994                 
                                                  [In percent]                                                  
----------------------------------------------------------------------------------------------------------------
                                                                              Self-assessed health status \2\   
                                                              All persons --------------------------------------
                       Characteristic                             \1\                  Very                     
                                                              (thousands)  Excellent   good   Good   Fair   Poor
----------------------------------------------------------------------------------------------------------------
Gender:                                                                                                         
    Men.....................................................     12,932       16.7     22.6   32.2   18.3   10.2
    Women...................................................     18,094       14.9     23.3   34.2   18.4    9.1
Family income:                                                                                                  
    Under $10,000...........................................      4,067       10.7     17.8   30.8   23.9   16.8
    $10,000-$19,999.........................................      7,226       13.6     21.6   34.4   19.6   10.8
    $20,000-$34,999.........................................      6,741       16.4     25.5   34.7   16.8    6.6
    $35,000 and over........................................      5,148       22.5     26.9   32.7   12.8    5.1
                                                             ---------------------------------------------------
        All persons 65+ years \3\...........................     31,026       15.7     23.0   33.4   18.4   9.6 
----------------------------------------------------------------------------------------------------------------
\1\ Includes unknown health status.                                                                             
\2\ The categories related to this concept result from asking the respondent, ``Would you say your health is    
  excellent, very good, good, fair, or poor?'' As such, it is based on the respondent's opinion and not directly
  on any clinical evidence.                                                                                     
\3\ Includes unknown family income.                                                                             
                                                                                                                
 Note.--Percentages may not add to 100 percent due to rounding. Data are based on household interviews of the   
  civilian, noninstitutionalized population.                                                                    
                                                                                                                
 Source: National Center for Health Statistics (1995a, Table 70).                                               

                    CAUSES OF DEATH FOR THE ELDERLY

    Table B-5 shows the 10 leading causes of death for three 
subgroups of the older population. In the United States, two-
thirds of elderly persons die from heart disease, cancer, or 
stroke (National Center for Health Statistics, 1997c). Heart 
disease was the major cause of death among the elderly in 1960, 
and remains so today despite rapid declines in age-adjusted 
death rates from heart disease that are due to improvements in 
treatments as well as lifestyle changes. Cancer death rates 
among the elderly, however, have risen during the same period, 
due especially to increases in lung cancer deaths (National 
Center for Health Statistics, 1997a). In 1995, heart disease 
still accounted for 36 percent of all deaths among persons 65 
and older, while cancer accounted for 22 percent of all deaths 
in this age group. The third leading cause of death among the 
elderly--stroke (cerebrovascular disease)--has been decreasing 
over the past 30 years. In 1995, cerebrovascular disease 
accounted for only 8 percent of all deaths in the 65 and older 
age group (NCHS, 1997c).

   TABLE B-5.--DEATH RATES FOR 10 LEADING CAUSES OF DEATH AMONG OLDER   
                           PEOPLE BY AGE, 1995                          
            [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.....     1,835       800     2,065     6,484
2...  Malignant neoplasms.......     1,137       868     1,365     1,824
3...  Cerebrovascular diseases..       414       137       481     1,637
4...  Chronic obstructive                                               
       pulmonary diseases.......       264       161       352       528
5...  Pneumonia and influenza...       222        57       233     1,036
6...  Diabetes..................       133        87       163       278
7...  Accidents.................        87        45        98       268
8...  Alzheimer's disease.......        60        11        73       275
9...  Nephritis, nephrotic                                              
       syndrome, nephrosis......        60        25        73       207
10..  Septicemia................        50        21        60       173
      All other causes..........       791       352       889     2,760
                                 ---------------------------------------
      All causes................     5,053     2,564     5,852   15,470 
------------------------------------------------------------------------
Source: National Center for Health Statistics (1997c, tables 7 and 9).  

    Alzheimer's disease (AD) is now the eighth leading cause of 
death for older people. Alzheimer's has only been classified as 
a unique cause of death since 1979, so reported death rates 
have been increasing rapidly since that year, and probably do 
not yet reflect the actual numbers of deaths attributable to 
the disease. Alzheimer's affects approximately 4 million 
Americans at present, including about 12 percent of the 
population over 65 and nearly half of those age 85 and older 
(Hodes, 1997). Death rates from AD are also highly age related 
(NCHS, 1997c). Presence of Alzheimer's may be masked by 
inability to confirm the diagnosis except by autopsy of brain 
tissue, although new diagnostic tools are being developed. In 
the future, reporting of Alzheimer's disease as the cause of 
death is likely to increase, and more accurately reflect its 
true prevalence and impact.

  MEDICARE REIMBURSEMENT AND OUT-OF-POCKET LIABILITIES OF THE ELDERLY

    Tables B-6 through B-8 illustrate for 5 selected years how 
Medicare reimbursement, acute health care costs, and out-of-
pocket liabilities of Medicare enrollees have changed. The 
years chosen are 1975, 1980, 1985, 1990 and 1995. Constant 1995 
dollar values were obtained using the 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 12.1 percent, while the growth in total costs 
(including enrollees' share of costs) is 10.5 percent (see 
table B-6). As a result, the share of SMI costs reimbursed by 
Medicare increases significantly over the period--from about 64 
percent in 1975 to about 76 percent by 1995. The growth in 
Medicare's share is caused by the declining significance of the 
SMI deductible, so that more enrollees' costs are eligible for 
reimbursement.

            TABLE B-6.--REIMBURSEMENTS AND OUT-OF-POCKET COSTS UNDER MEDICARE, SELECTED YEARS 1975-95           
                                     [Incurred costs per HI or SMI enrollee]                                    
----------------------------------------------------------------------------------------------------------------
                                                                               Year                     Average 
                                                           -------------------------------------------   annual 
                                                                                                        rate of 
                          Source                                                                         growth 
                                                             1975    1980     1985     1990     1995    1975-95 
                                                                                                       (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)In current dollars                                                                                           
                                                                                                                
                                                           -----------------------------------------------------
Hospital insurance:                                                                                             
    Reimbursement.........................................    $466    $920   $1,570   $1,981   $3,201      10.1 
    Copayments............................................      34      67      119      187      244      10.4 
                                                           -----------------------------------------------------
        Total.............................................     500     986    1,690    2,168    3,445      10.1 
                                                           =====================================================
Supplementary medical insurance:                                                                                
    Reimbursement.........................................     186     399      766    1,307    1,819      12.1 
    Copayments............................................      84     137      248      400      547       9.8 
    Balance billing.......................................      22      56       87       68       13      -2.6 
                                                           -----------------------------------------------------
        Total.............................................     291     592    1,101    1,775    2,379      11.1 
                                                           =====================================================
        Total Medicare reimbursement......................     651   1,318    2,336    3,288    5,020      10.8 
                                                           =====================================================
        Total costs under Medicare........................     792   1,579    2,791    3,944    5,824      10.5 
                                                           -----------------------------------------------------
                                                                                                                
                                                                                                                
(5)In constant 1995 dollars                                                                                     
                                                                                                                
                                                           -----------------------------------------------------
Hospital insurance:                                                                                             
    Reimbursement.........................................   1,263   1,703    2,225    2,310    3,201       4.8 
    Copayments............................................      93     124      169      218      244       4.9 
                                                           -----------------------------------------------------
        Total.............................................   1,356   1,827    2,394    2,529    3,445       4.8 
                                                           =====================================================
Supplementary medical insurance:                                                                                
    Reimbursement.........................................     503     738    1,085    1,524    1,819       6.6 
    Copayments............................................     227     254      352      467      547       4.5 
    Balance billing.......................................      60     104      124       80       13      -7.4 
                                                           -----------------------------------------------------
        Total.............................................     790   1,097    1,560    2,071    2,379       5.7 
                                                           =====================================================
        Total Medicare reimbursement......................   1,766   2,441    3,310    3,834    5,020       5.4 
                                                           =====================================================
        Total costs under Medicare........................   2,147   2,924    3,955    4,599    5,824       5.1 
                                                           =====================================================
        Percent of costs paid by Medicare.................    82.3    83.5     83.7     83.4     86.2      0.2  
----------------------------------------------------------------------------------------------------------------
Note.--The CPI-U was used to get constant dollars.                                                              
                                                                                                                
 Source: Congressional Budget Office.                                                                           


                        TABLE B-7.--ENROLLEE COSTS UNDER MEDICARE, SELECTED YEARS 1975-95                       
                                     [Incurred costs per HI or SMI enrollee]                                    
----------------------------------------------------------------------------------------------------------------
                                                                              Year                      Average 
                                                         ---------------------------------------------   annual 
                                                                                                        rate of 
                         Source                                                                          growth 
                                                            1975     1980     1985     1990     1995    1975-95 
                                                                                                       (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)In current dollars                                                                                           
                                                                                                                
                                                         -------------------------------------------------------
Hospital insurance copayments...........................      $34      $67     $119     $187     $244       10.4
Supplementary medical insurance copayments..............       84      137      248      400      547        9.8
Balance billing.........................................       22       56       87       68       13       -2.6
                                                         -------------------------------------------------------
    Total direct costs..................................      140      260      455      656      804        9.1
                                                         =======================================================
Premium costs...........................................       80      110      186      343      553       10.1
                                                         -------------------------------------------------------
    Total enrollee costs................................      221      371      641      999    1,357        9.5
                                                         =======================================================
Enrollee per capita income \1\..........................    5,158    8,431   12,767   15,454   16,460        6.0
                                                         -------------------------------------------------------
                                                                                                                
                                                                                                                
(5)In constant 1995 dollars                                                                                     
                                                                                                                
                                                         -------------------------------------------------------
Hospital insurance copayments...........................       93      124      169      218      244        4.9
Supplementary medical insurance copayments..............      227      254      352      467      547        4.5
Balance billing.........................................       60      104      124       80       13       -7.4
                                                         -------------------------------------------------------
    Total direct costs..................................      381      482      644      765      804        3.8
                                                         =======================================================
Premium costs...........................................      218      204      264      400      553        4.8
                                                         -------------------------------------------------------
    Total enrollee costs................................      599      687      908    1,165    1,357        4.2
                                                         =======================================================
Enrollee per capita income \1\..........................   13,983   15,613   18,094   18,024   16,460        0.8
                                                         -------------------------------------------------------
                                                                                                                
                                                                                                                
(5)Percent of costs under Medicare paid by enrollees, by                                                        
 source of payment                                                                                              
                                                                                                                
                                                         -------------------------------------------------------
Hospital insurance copayments...........................      4.4      4.2      4.3      4.7      4.2       -0.2
Supplementary medical insurance copayments..............     10.6      8.7      8.9     10.1      9.4       -0.6
Balance billing.........................................      2.8      3.6      3.1      1.7      0.2      -12.4
                                                         -------------------------------------------------------
    Total direct costs..................................     17.7     16.5     16.3     16.6     13.8       -1.2
                                                         =======================================================
Premium costs...........................................     10.2      7.0      6.7      8.7      9.5       -0.4
                                                         -------------------------------------------------------
    Total enrollee costs................................     27.9     23.5     23.0     25.3     23.3       -0.9
                                                         =======================================================
Enrollee-paid costs as a percent of enrollee per capita                                                         
 income \1\.............................................      4.3      4.4      5.0      6.5      8.2       3.3 
----------------------------------------------------------------------------------------------------------------
\1\ From the Current Population Survey, with income adjusted for underreporting.                                
                                                                                                                
 Note.--The CPI-U was used to calculate constant dollars. HI = hospital insurance, SMI = supplementary medical  
  insurance.                                                                                                    
                                                                                                                
 Source: Congressional Budget Office.                                                                           


            TABLE B-8.--COPAYMENT AND PREMIUM VALUES UNDER MEDICARE, SELECTED CALENDAR YEARS, 1975-95           
----------------------------------------------------------------------------------------------------------------
                                                                                Year                    Average 
                                                              ----------------------------------------   annual 
                                                                                                        rate of 
                                                                                                         growth 
                                                                1975    1980    1985    1990    1995    1975-95 
                                                                                                       (percent)
----------------------------------------------------------------------------------------------------------------
                                                                                                                
(5)In current dollars                                                                                           
                                                              --------------------------------------------------
Hospital insurance:                                                                                             
    Hospital deductible......................................     $92    $180    $400    $592    $716       10.8
Supplementary medical insurance:                                                                                
    Annual deductible........................................      60      60      75      75     100        2.6
    Monthly premium \1\......................................    6.70    9.20   15.50   28.60   46.10       10.1
                                                              --------------------------------------------------
                                                                                                                
(5)In constant 1995 dollars                                                                                     
                                                              --------------------------------------------------
Hospital insurance:                                                                                             
    Hospital deductible......................................     249     333     567     690     716        5.4
Supplementary medical insurance:                                                                                
    Annual deductible........................................     163     111     106      87     100       -2.4
    Monthly premium \1\......................................   18.16   17.04   21.97   33.36   46.10       4.8 
----------------------------------------------------------------------------------------------------------------
\1\ The 1980 supplementary medical insurance monthly premium amount is the average of values for the first and  
  second halves of the year.                                                                                    
                                                                                                                
 Note.--The CPI-U was used to calculate constant dollars.                                                       
                                                                                                                
 Source: Congressional Budget Office.                                                                           

    In the Hospital Insurance (HI) Program, by contrast, the 
rate of growth in reimbursement is roughly comparable to the 
growth in enrollee's copayment costs. Consequently, the share 
of HI costs reimbursed by Medicare was 93 percent in both 1975 
and 1995.
    Overall, the share of costs reimbursed by Medicare has 
increased slightly. The percentage of costs paid by Medicare 
for services covered under Medicare was 82.3 percent in 1975 
and 86.2 percent in 1995 (see table B-6). The share of costs 
paid directly by enrollees is shown in the third panel of table 
B-7. Total direct costs plus Medicare reimbursement equals the 
total or 100 percent.
    In constant dollars, HI copayments increased the most 
rapidly between 1975 and 1990. However, between 1990 and 1995, 
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 (see table B-8 for deductible amounts 
and monthly premium amounts under Medicare).
    Enrollees are spending an increasing share of their income 
for Medicare's cost sharing and premium charges. In 1975, about 
4.3 percent of enrollees' per capita income went to cover their 
share of acute health care costs under Medicare. By 1995, this 
figure had risen to 8.2 percent.
    Although total direct household spending for all health 
care by elderly households as a share of household income has 
increased since the early 1970s, it has remained relatively 
stable in recent years. Chart B-1 illustrates direct household 
spending for health care as a percentage of household income 
before taxes for elderly 

CHART B-1. DIRECT HOUSEHOLD SPENDING FOR HEALTH CARE AS A PERCENTAGE OF 
            HOUSEHOLD INCOME, BY TYPE OF HOUSEHOLD, 1985-95 





    Notes._Direct household spending for health care includes 
the amount directly paid for health insurance premiums by a 
household, as well as other out-of-pocket spending for health 
care services, including deductibles and copayments.
    Elderly households are those in which the primary owner or 
renter of the household is 65 or older. Such households may 
include individuals younger than 65. Nonelderly households are 
those in which the primary owner or renter of the household is 
younger than 65. Such households may include individuals age 65 
or older.
    Although expenditures for health care by the institutional 
population are not collected by the CES, if a member residing 
in the household contributes to health-related expenses of an 
institutionalized person, then those expenditures are counted 
as direct household spending for health care.
    Household income refers to income before taxes.

    Source: Congressional Budget Office calculations based on 
data from the Consumer Expenditure surveys (CES) of the Bureau 
of Labor Statistics, 1985-95.


and nonelderly households for years 1985-95. In 1995, direct 
household spending for health care as a percentage of household 
income for elderly households was 12.0 percent, on average, up 
from 10.4 percent in 1985. Over the same period, nonelderly 
households spent around 3.6 percent of their household income 
for health care.

        CHANGES IN REAL SPENDING PER MEDICARE ENROLLEE, 1967-95

    Real Medicare spending per enrollee removes the effects of 
changes in Medicare enrollment and general inflation from total 
Medicare spending (see table B-9). Since both enrollment and 
prices are almost always increasing, the growth of real per 
enrollee spending is slower than the growth of total spending. 
Overall, real spending per enrollee grew at an average annual 
rate of 7.0 percent over the 1980-85 period; the rate declined 
to 4.8 percent per enrollee over the 1990-95 period. Similarly, 
real inpatient hospital spending per enrollee grew at an annual 
rate of 6.4 percent between 1980 and 1985; the rate declined to 
2.5 percent over the 1990-95 period. The difference in these 
rates is attributable to changes in admissions per enrollee and 
real expenditures per admission. The reduction in real 
expenditures per admission reflects the impact of the 
implementation of the hospital prospective payment system.
    Costs in hospital outpatient departments have dropped 
relative to the previous trend, indicating that hospital 
inpatient costs have not simply been shifted to the outpatient 
sector. Introduction of a new payment methodology (a blend of a 
fixed rate and the hospital's costs) for certain surgical 
procedures performed in outpatient departments tended to reduce 
costs somewhat, but this effect was partially offset by the 
shift of services from the inpatient sector.
    At least some portion of growth in the volume of covered 
home health visits may represent a delayed response to an 
increasing need for skilled home care resulting from incentives 
contained within Medicare's hospital prospective payment system 
to discharge patients more quickly to their homes. During early 
years of hospital prospective payment, HCFA had in place 
medical review and claims processing policies that had resulted 
in high denial rates for provided care. These policies were 
relaxed by 1989. In addition, the 1989 revised coverage policy 
guidelines are believed to account for a large portion of the 
increase in volume because they liberalized coverage policies.
    Growth in spending for physicians' services reflects the 
fact that Medicare began paying for physicians services on the 
basis of a fee schedule beginning in 1992. Payments for 
laboratory services have been constrained by the implementation 
of tighter controls under the laboratory fee schedule.

                                          TABLE B-9.--REAL SPENDING PER MEDICARE ENROLLEE, FISCAL YEARS 1967-95                                         
                                                               [In constant 1995 dollars]                                                               
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                    Supplementary              Skilled    Home                          
                         Fiscal years                          Medicare   Hospital     medical      Hospital   nursing   care &    Outpatient  Physician
                                                                         insurance    insurance    inpatient  facility   hospice  departments    & lab  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7)Estimates by the Health Care Financing Administration                                                                                                
                                                              ------------------------------------------------------------------------------------------
1967.........................................................      $762       $553         $157         $528       $21        $5          $3        $153
1968.........................................................     1,146        787          311          705        72        12          10         298
1969.........................................................     1,339        932          345          849        73        14          16         325
1970.........................................................     1,359        904          385          837        56        16          19         360
1971.........................................................     1,405        963          371          917        38        14          25         340
1972.........................................................     1,494      1,026          389          989        29        14          31         353
1973.........................................................     1,463      1,013          381          977        27        14          30         346
1974.........................................................     1,520      1,033          396          994        28        20          43         344
1975.........................................................     1,740      1,212          450        1,164        32        25          63         378
1976.........................................................     1,901      1,304          507        1,248        33        35          79         415
1977.........................................................     2,066      1,421          570        1,360        33        41          94         462
1978.........................................................     2,208      1,517          608        1,455        31        46         106         486
1979.........................................................     2,284      1,550          655        1,487        29        49         116         524
1980.........................................................     2.412      1,631          706        1,568        27        52         126         565
1981.........................................................     2.607      1,766          765        1,702        24        55         137         613
1982.........................................................     2,840      1,926          841        1,839        25        66         163         675
1983.........................................................     3,018      2,012          935        1,906        28        78         179         755
1984.........................................................     3,123      2,064          982        1,951        27        87         178         802
1985.........................................................     3,384      2,260        1,042        2,142        26        94         187         853
1986.........................................................     3,441      2,212        1,151        2,095        26        92         226         923
1987.........................................................     3,532      2,151        1,305        2,042        27        84         253       1,051
1988.........................................................     3,570      2,103        1,387        1,989        29        87         266       1,119
1989.........................................................     3,684      2,171        1,427        1,994        85        93         283       1,141
1990.........................................................     3,912      2,324        1,506        2,097        99       130         303       1,199
1991.........................................................     3,882      2,257        1,544        1,999        82       179         313       1,228
1992.........................................................     4,187      2,526        1,570        2,164       116       248         346       1,221
1993.........................................................     4,392      2,699        1,610        2,238       156       309         370       1,237
1994.........................................................     4,684      2,888        1,710        2,303       201       388         402       1,304
1995.........................................................     4,951      3,077        1,720        2,375       248       459         425       1,361
                                                              ------------------------------------------------------------------------------------------
                                                                                                                                                        
                                                                                                                                                        
(7)Average annual growth rates (in percent)                                                                                                             
                                                              ------------------------------------------------------------------------------------------
1975-1980....................................................       6.8        6.1          9.4          6.1      -3.4      16.3        14.7         8.4
1980-1985....................................................       7.0        6.7          8.1          6.4      -0.7      12.5         8.3         8.6
1985-1990....................................................       2.9        0.6          7.6         -0.4      30.8       6.8        10.2         7.1
1990-1995....................................................       4.8        5.8          3.5          2.5      20.0      28.6         7.0        2.6 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Column 1 includes both benefit and administrative costs. All other columns include only benefits. The CPI-U was used to calculate constant       
  dollars.                                                                                                                                              
                                                                                                                                                        
 Source: Congressional Budget Office.                                                                                                                   

    Spending for skilled nursing facilities (SNFs) increased 
significantly. During the period from 1975 through 1985, real 
spending per enrollee for SNFs was falling. This trend was 
reversed during the late 1980s. In 1988, growth in SNF spending 
accelerated sharply because of a revision in the manual used by 
administrative agents to determine Medicare coverage that 
greatly relaxed the definition of covered care to make it 
conform with legislative language. Growth in SNF spending 
further accelerated in 1989 under provisions of the Medicare 
Catastrophic Coverage Act, which briefly eliminated the 
requirement for a hospital stay prior to a covered SNF stay and 
which reduced the copayments required of enrollees for SNF 
stays.
    Table B-9 shows Medicare spending per enrollee in constant 
1995 dollars. The first column includes both Medicare benefits 
and administration. All other columns include spending on 
benefits only.

            OUT-OF-POCKET SPENDING BY MEDICARE BENEFICIARIES

     In 1992, Medicare covered approximately 53 percent of the 
health care expenditures of program beneficiaries (55 percent 
for the aged and 43 percent for the disabled). The majority of 
beneficiaries had other coverage, either through private 
insurance or public programs, to supplement their Medicare 
protection. Medicaid paid an additional 14 percent of the 
health costs of the Medicare population while private insurance 
covered 10 percent and other sources (such as the Veterans 
Administration) covered an additional 5 percent. (For a 
discussion of supplemental coverage see section 3, Medicare.) 
However, beneficiaries still financed 20 percent of their 
medical bills through out-of-pocket payments to health care 
providers. The proportion of expenditures that beneficiaries 
paid out of pocket varied by service category, ranging from 2 
percent for hospital services to 57 percent for prescription 
drugs and 83 percent for dental care. Beneficiaries also paid 
approximately 36 percent of their long-term facility care costs 
out of pocket (Lashober and Olin, 1996).
     In 1992, the estimated average out-of-pocket expenditure 
for a noninstitutionalized beneficiary not enrolled in a 
managed care plan was $1,833 (PPRC, 1997). In 1996, the 
estimated out-of-pocket expenditure (using a different data 
base) was $2,605 (Moon, Kuntz & Pounder, 1996). Out-of-pocket 
payments include expenditures for Medicare's cost-sharing 
charges, payments for services not covered by Medicare or 
supplemental insurance. Over half of out-of-pocket expenditures 
are for private insurance premiums and Medicare part B premiums 
(see table B-10).
     Beneficiaries with greater supplemental coverage also have 
higher out-of-pocket costs. For example, noninstitutionalized 
fee-for-service beneficiaries who paid out of pocket toward the 
costs of individually purchased and employer-provided 
supplemental insurance spent an average of $2,638 in 1992. 
Those noninstitutionalized fee-for-service beneficiaries who 
had no supplemental coverage spent an average of $1,294 out of 
pocket in 1992 (PPRC, 1997).
     An analysis of 1996 data shows that out-of-pocket costs 
represented 21 percent of household income for the elderly. 
Out-of-pocket spending ranged from 11 percent of household 
income for the high-income group, 18 percent for the middle 
income, 26 percent for the low income, 30 percent for the poor, 
and 31 percent of income for the near poor (Moon et al., 1996).

   TABLE B-10.--DISTRIBUTION OF AVERAGE OUT-OF-POCKET EXPENDITURES, BY  
                       CATEGORY OF SERVICES, 1992                       
------------------------------------------------------------------------
                          Category                            Percentage
------------------------------------------------------------------------
 Medical provider..........................................           16
 Prescription drugs........................................           16
Dental.....................................................            7
Other services.............................................            5
Supplemental insurance premiums............................           38
Medicare part B premiums...................................           18
                                                            ------------
    Total..................................................          100
------------------------------------------------------------------------
Note.--Excludes out-of-pocket spending by institutionalized             
  beneficiaries and those enrolled in managed care plans.               
                                                                        
 Source: Physician Payment Review Commission, 1997.                     

                   BACKGROUND DATA ON LONG-TERM CARE

    The phrase long-term care refers to a broad range of 
medical, social, personal, supportive, and specialized housing 
services needed by individuals who have lost some capacity for 
self-care because of a chronic illness or condition. Chronic 
illnesses or conditions often result in both functional 
impairment and physical dependence on others for an extended 
period of time. Major subgroups of persons needing long-term 
care include the elderly and nonelderly disabled, persons with 
developmental disabilities (primarily persons with mental 
retardation), and persons with mental illness. This section of 
appendix B focuses on the elderly long-term care population.
    The range of chronic illnesses and conditions resulting in 
the need for supportive long-term care services is extensive. 
Unlike acute medical illnesses, which occur suddenly and may be 
resolved in a relatively short period of time, chronic 
conditions last for an extended period of time and are not 
typically curable. Although chronic conditions occur in 
individuals of all ages, their incidence, especially as they 
result in disability, increases with age. These conditions may 
include heart disease, strokes, arthritis, osteoporosis, and 
vision and hearing impairments. Dementia, the chronic, often 
progressive loss of intellectual function, is also a major 
cause of disability in the elderly.
    The presence of a chronic illness or condition alone does 
not necessarily result in a need for long-term care. For many 
individuals, their illness or condition does not result in a 
functional impairment or dependence and they are able to go 
about their daily routines without needing assistance. But when 
the illness or condition results in a functional or activity 
limitation, long-term care services may be required.
    The need for long-term care by the elderly is often 
measured by assessing limitations in a person's capacity to 
manage certain functions or activities. For example, a chronic 
condition may result in dependence in certain functions that 
are basic and essential for self-care, such as bathing, 
dressing, eating, toileting, and/or moving from one place to 
another. These are referred to as limitations in activities of 
daily living, or ADLs. Another set of limitations, which 
reflect lower levels of disability, are used to describe 
difficulties in performing household chores and social tasks. 
These are referred to as limitations in instrumental activities 
of daily living, or IADLs, and include such functions as meal 
preparation, cleaning, grocery shopping, managing money, and 
taking medicine. Limitations can vary in severity and 
prevalence, so that persons can have limitations in any number 
of ADLs or IADLs, or both.
    Long-term care services are often differentiated by the 
settings in which they are provided. In general, services are 
provided either in nursing homes or in home and community-based 
care settings. Nursing home care includes a wide variety of 
services that range from skilled nursing and therapy services 
to assistance with such personal care functions as bathing, 
dressing, and eating. Nursing home services also include room 
and board.
    Home and community-based care also includes a broad range 
of skilled and personal care services, as well as a variety of 
home management activities, such as chore services, meal 
preparation, and shopping. Home care services can be provided 
formally by home care agencies, visiting nurse associations, 
and day care centers. Home care is also provided informally by 
family and friends who are not paid for the services they 
provide. In contrast to nursing home care, which by necessity 
is formally provided care, most home and community-based care 
is provided informally by family and friends. Research has 
shown that about 65 percent of those elderly persons living in 
the community and needing long-term care assistance rely 
exclusively on unpaid sources of assistance for their care.

                     The Long-Term Care Population

    Limitations in ADLs and IADLs can vary in severity and 
prevalence. Persons can have limitations in any number of ADLs 
or IADLs, or both. An estimated 7.3 million elderly persons 
required assistance with ADLs and IADLs in 1994. This is nearly 
one-quarter of the Nation's elderly. Of this total, an 
estimated 5.7 million elderly persons resided in their own 
homes or other community-based settings and 1.6 million elderly 
were residing in nursing homes. Of the total residing in the 
community, 2.1 million had severe disabilities, needing help 
with at least 3 ADLs or required substantial supervision due to 
cognitive impairment or other behavioral problem. The remaining 
3.6 million resided in the community with lower levels of 
disability.
    The need for long-term care assistance is expected to 
become more pressing in years to come, given the aging of the 
population and especially the growing numbers of the age 85 and 
older population who are at the greatest risk of using long-
term care. Estimates show that the number of elderly needing 
help with ADLs and/or IADLs may grow from 7.3 million to 10 to 
14 million by 2020, and 14 to 24 million by 2060 (U.S. General 
Accounting Office, 1994, p. 8).

                   Paying for Long-Term Care Services

    Table B-11 indicates that sizable public and private funds 
are being spent on long-term care for the elderly--nearly $91 
billion in 1995. Federal and State governments account for the 
bulk of this spending, $55 billion or 60 percent of the total.

 TABLE B-11.--ELDERLY LONG-TERM CARE EXPENDITURES BY SOURCE OF PAYMENT, 
                                  1995                                  
                        [In billions of dollars]                        
------------------------------------------------------------------------
                     Source of spending                         Amount  
------------------------------------------------------------------------
Nursing home care:                                                      
    Medicaid...............................................        $24.2
    Medicare...............................................          8.4
    Other Federal..........................................          0.7
    Other State and local..................................          0.6
    Out-of-pocket payments.................................         30.0
    Private insurance......................................          0.4
                                                            ------------
        Total..............................................         64.4
                                                            ============
Home and community-based care:                                          
    Medicaid...............................................          4.3
    Medicare...............................................         14.3
    Other Federal..........................................          1.7
    Other State and local..................................          0.5
    Out-of-pocket payments.................................          5.5
    Private insurance......................................          0.3
                                                            ------------
        Total..............................................         26.5
                                                            ============
            Total long-term care...........................        90.9 
------------------------------------------------------------------------
Source: The Lewin Group for the Office of the Assistant Secretary for   
  Planning and Evaluation.                                              

    Approximately 70 percent of long-term care spending on the 
elderly is for nursing home care. Examination of the sources of 
payment for nursing home care reveals that the elderly face 
significant uncovered liability for this care. Two sources of 
payment--the Medicaid Program and out-of-pocket payments--
account for nearly 84 percent of this total.
    Medicaid is the Federal-State health program for the poor. 
It limits coverage to those people who are poor by welfare 
program standards or those who have become poor as a result of 
incurring large medical expenses. Medicaid Program data show 
that spending for the elderly is driven largely by its coverage 
of people who have become poor as the result of depleting 
assets and income on the cost of nursing home care. In most 
States, this spend down requirement means that a nursing home 
resident without a spouse can not have more than $2,000 in 
countable assets before becoming eligible for Medicaid coverage 
of their care. This is not difficult for persons needing 
nursing home care, with average cost in excess of $40,000 per 
year.
    Table B-11 also indicates that nearly all private spending 
for nursing home care is paid directly by consumers out of 
pocket. At present, private insurance coverage for long-term 
nursing home care is very limited, with private insurance 
payments amounting to 0.6 percent of total spending for nursing 
home care in 1995. (Private long-term care insurance is 
discussed in additional detail below.)
    While most persons needing long-term care live in the 
community and not institutions, comparatively little long-term 
care spending is for the home and community-based services that 
the elderly and their families prefer. In 1995, spending on 
home care for the elderly amounted to $26.5 billion, or 30 
percent of total long-term care spending for the elderly in 
that year. This spending does not take into account the 
substantial support provided to the elderly by family and 
friends. Studies have found that about 65 percent of 
functionally impaired elderly living in the community rely 
exclusively on unpaid sources, generally family and friends, 
for their care. Surveys have found that eight of ten care 
givers provide unpaid assistance averaging 4 hours a day, 7 
days a week. Many care givers are financially disadvantaged and 
one in three is in relatively poor health. Care giving 
frequently competes with the demands of employment and requires 
care givers to reduce work hours, take time off without pay, or 
quit their jobs.
    The table also reveals that Medicare plays a relatively 
small role in financing long-term care services. Medicare, the 
Federal health insurance program for the elderly and disabled, 
is focused primarily on coverage of acute health care costs and 
was never envisioned as providing protection for long-term 
care. Coverage of nursing home care, for instance, is limited 
to short-term stays in certain kinds of nursing homes, referred 
to as skilled nursing facilities, and only for those people who 
demonstrate a need for daily skilled nursing care or other 
skills and rehabilitation services following a hospitalization. 
Many people who require long-term nursing home care do not need 
daily skilled care, and, therefore, do not qualify for 
Medicare's benefit. As a result of this restriction, Medicare 
paid for 13 percent of the elderly's nursing home spending in 
1995.
    For similar reasons, Medicare pays for only limited--albeit 
rapidly growing--amounts of community-based long-term care 
services, through the program's home health benefit. To qualify 
for home health services, the person must be in need of skilled 
nursing care on an intermittent basis, or physical or speech 
therapy. Most chronically impaired people do not need skilled 
care to remain in their homes, but rather nonmedical supportive 
care and assistance with basic self-care functions and daily 
routines that do not require skilled personnel. When added 
together, Medicare's spending for nursing home and home health 
care for the elderly amounted to approximately 25 percent of 
total program spending in 1995.
    Three other Federal programs--the Social Services Block 
Grant (SSBG), the Older Americans Act, and the Supplemental 
Security Income (SSI) Program--provide support for community-
based long-term care services for impaired elderly people. The 
SSBG provides block grants to States for a variety of services 
for the elderly, as well as the disabled and children. The 
Older Americans Act also funds a broad range of in-home 
services for the elderly. Under the SSI Program, the federally 
administered income assistance program for aged, blind, and 
disabled people, many States provide supplemental payments to 
the basic SSI payment to support selected community-based long-
term care services for certain eligible people, including the 
frail elderly. However, since the funding available for these 
three programs is limited, their ability to address the 
financing problems in long-term care is also limited. In 
addition to these Federal programs, a number of States devote 
significant State funds to home and community-based long-term 
care services.
    As noted above, the Medicaid Program, a means-tested 
Federal-State health program for the poor, is the major source 
of public support for long-term care for the elderly. It funds 
a broad range of long-term care services needed by the elderly, 
including nursing home care, home health care, personal care, 
and various home and community-based services.
    Long-term care spending, and especially nursing home 
spending, account for the great bulk of Medicaid's spending for 
the elderly. As shown in table B-12, below two-thirds of total 
Medicaid spending for the elderly, or $24.1 billion of $36.5 
billion, was for nursing home care in fiscal year 1995. Much 
smaller amounts were spent for various home care services--$3.0 
billion, or 8 percent of total spending for the elderly, in 
fiscal year 1995. Together these two categories of long-term 
care spending amounted to three-quarters of total spending for 
the elderly.

 TABLE B-12.--FEDERAL AND STATE MEDICAID SPENDING FOR PEOPLE ELIGIBLE ON
          THE BASIS OF BEING AGE 65 OR OLDER, FISCAL YEAR 1995          
                    [Amounts in millions of dollars]                    
------------------------------------------------------------------------
                                                             Percent of 
                Service category                  Payments      total   
------------------------------------------------------------------------
Nursing homes..................................    $24,146          66.2
Home care services.............................      2,990           8.2
Prescription drugs.............................      2,861           7.8
Inpatient hospital.............................      2,034           5.6
Inpatient mental health........................      1,178           3.2
Intermediate care facility.....................        637           1.7
Physician services.............................        617           1.7
Outpatient hospital............................        508           1.4
Clinic services................................        258           0.7
Other practitioner.............................         96           0.3
Laboratory and radiology.......................         73           0.2
Dental services................................         61           0.2
Rural health clinics...........................         11           0.0
Other services.................................      1,011           2.8
                                                ------------------------
      Total expenditures.......................     36,482        100.0 
------------------------------------------------------------------------
Source: Congressional Research Service analysis of data from the HCFA   
  form 2082.                                                            

    Medicaid's spending for long-term care for the elderly is 
driven by its coverage of persons who need nursing home care 
and who are not poor by cash welfare standards, but who qualify 
under a spend down option and other more liberal financial 
eligibility standards that States may use for covering persons 
needing institutional care and having higher levels of income. 
One of these is the medically needy option. Medically needy 
persons have incomes too high to qualify for cash welfare, but 
incur medical expenses that deplete their assets and incomes to 
levels that make them needy according to State-determined 
standards. States may also use a special income rule, referred 
to as the 300 percent rule, for extending Medicaid eligibility 
to persons needing nursing home care. Under this rule, States 
are allowed to cover persons needing nursing home care so long 
as their income does not exceed 300 percent of the basic 
Supplemental Security Income (SSI) cash welfare payment (in 
1997, 300 percent of $484, or $1,452 a month).
     A June 1996 study, ``Spending Down to Medicaid: New Data 
on the Role of Medicaid in Paying for Nursing Home Care'' 
(Wiener, Sullivan, & Skaggs) confirms that Medicaid's coverage 
of nursing home care provides a significant safety net for the 
middle class as well as for the poor. This study calculated 
three different measures of Medicaid spend down using surveys 
that tracked persons who were discharged from nursing homes as 
well as current residents of facilities during a 5-year period.
     The first method used by the study examined discharged and 
current residents who were private payers at admission and 
calculated the proportion who were Medicaid at discharge or at 
the end of the followup period. More formally, the numerator 
for this method is all persons who are eligible for Medicaid at 
some point during their nursing home stays and the denominator 
is all persons who start their nursing home stays as private 
payers. The second method examined discharged and current 
residents who were Medicaid at discharge or at the end of the 
followup period and determined what proportion were private pay 
at the beginning of their nursing home stay. The numerator for 
this method is all persons receiving Medicaid at discharge or 
at the end of a followup period who began their stays as 
private-pay residents, while the denominator is all persons 
receiving Medicaid at discharge or at the end of the followup 
period. The third method examined total discharged and current 
residents and calculated what proportion began their stays as 
private-pay residents but were Medicaid eligible at discharge 
or at the end of the followup period. Here the numerator is all 
persons receiving Medicaid at discharge or at the end of the 
followup period who began their nursing home stays as private-
pay residents, while the denominator is all persons who have 
nursing home stays.
     The study found:
 1. For discharged nursing home residents, approximately one-
        third of those admitted as private-pay residents 
        eventually spent down to Medicaid (spend down method 
        1). Just over one-quarter of Medicaid discharged 
        residents began their nursing home stays as private-pay 
        residents (spend down method 2). About one-seventh of 
        all discharged nursing home residents spent down to 
        Medicaid at some time during their stays (spend down 
        method 3).
 2. For current residents, almost half of those admitted as 
        private-pay residents eventually spent down to Medicaid 
        (spend down method 1). Just over one-quarter of current 
        residents eligible for Medicaid at some point began 
        their nursing home stays as private-pay residents 
        (spend down method 2). One-fifth of all current 
        residents spent down at some point during their stays 
        (spend down method 3).

                    Private Long-Term Care Insurance

    Private long-term care insurance is generally considered to 
be the most promising private sector option for providing the 
elderly additional protection for long-term care expenses. 
Long-term care insurance is a relatively new, but rapidly 
growing, market. In 1986, approximately 30 insurers were 
selling long-term care insurance policies of some type and an 
estimated 200,000 persons were covered by these policies. By 
1987, a Department of Health and Human Services Task Force on 
Long-Term Health Care Policies (1987) found 73 companies 
writing long-term care insurance policies covering 423,000 
persons. As of December 1995, the Health Insurance Association 
of America (Coronel & Kitchman, 1997) found that more than 4.35 
million policies had been sold, with 125 insurers offering 
coverage. (Note that this is a cumulative total of policies 
sold; fewer persons would be covered, due to failure to pay 
premiums because of death, a change in income, a decision not 
to continue coverage, etc.)
    Although growth has been considerable in a short period of 
time, the private insurance industry has approached this 
potential market with caution. Insurers are concerned about the 
potential for adverse selection in long-term care insurance, 
where only those persons likely to need care actually buy 
insurance. In addition, they point to the problem of induced 
demand for services that can be expected to be generated by the 
availability of new long-term care insurance. With induced 
demand, sometimes also referred to as moral hazard, individuals 
decide to use more services than they otherwise would because 
they have insurance and/or will shift from nonpaid to paid 
providers for their care. In addition, insurers are concerned 
that, given the nature of many chronic conditions, persons who 
need long-term care will need it for the remainder of their 
lives, resulting in an open-ended liability for the insurance 
company.
    As a result of these risks, insurers have designed policies 
that limit their liability for paying claims. Policies have 
been medically underwritten to exclude persons with certain 
conditions or illnesses. In addition, most plans provide 
indemnity benefits that pay only a fixed amount for each day of 
covered service. If these amounts are not updated for 
inflation, the protection offered by the policy can be 
significantly eroded by the time a person actually needs care. 
Today payment amounts can generally be updated for inflation, 
but only with significant increases in premium costs.
     These design features of long-term care insurance have 
always raised issues about the quality of coverage offered 
purchasers of policies. The insurance industry has responded to 
these concerns by offering new products that have provided 
broadened coverage and fewer restrictions. In addition, the 
National Association of Insurance Commissioners (NAIC) has 
established a model act and model regulations for long-term 
care insurance products sold within their jurisdictions. All 
States have adopted at least some portion of these standards to 
protect purchasers of these policies.
     One of the key issues outstanding in the debate on the 
role private insurance can play in financing long-term care is 
the affordability of coverage. HIAA reports on the premium 
costs of policies representing 80 percent of all policies sold 
in the individual and group association markets in 1995. For 
policies paying $100 a day for nursing home care and $50 a day 
for home health care, with lifetime 5 percent compounded 
inflation protection and a 20-day deductible period, average 
annual premiums in 1995 were $1,881 when purchased at the age 
of 65 and $5,889 when purchased at the age of 79. Many elderly 
people cannot afford these premiums.
     The insurance industry believes that affordability of 
premiums can be greatly enhanced if the pool of those to whom 
policies are sold is expanded. The industry has argued that the 
greatest potential for expanding the pool and reducing premiums 
lies with employer-based group coverage. Premiums should be 
lower in employer-based group coverage because younger age 
groups with lower levels of risk of needing long-term care 
would be included, allowing insurance companies to build up 
reserves to cover future payments of benefits. For example, the 
policy described above had an average annual premium of $798 
when purchased at the age of 50. In addition, group coverage 
has lower administrative expenses.
     According to HIAA, employer-based activity has increased 
steadily over the years. By the end of 1995, over 530,000 
policies had been sold across 1,260 employers. These employer-
based plans covered employees, their spouses, retirees, 
parents, and parents-in-law. In addition, the number of long-
term care riders that permit conversion of at least some 
portion of life insurance policies to long-term care benefits 
has grown from 1,300 policies in 1988 to a cumulative total of 
334,000 in 1995.
     But just how broad-based employer interest is in a new 
long-term care benefit is unclear. Many employers currently 
face large unfunded liabilities for retiree pension and health 
benefits. Employers are also concerned about benefit costs for 
their labor force. Of those employers sponsoring a long-term 
care insurance plan, less than half were making contributions 
to the premium cost of a policy, and almost all of those who 
had made contributions were very small firms (under 100 
employees), buying a base policy from the same long-term care 
insurance company (Unum), with an option for employees to 
upgrade the policy. The majority of employers sponsoring plans 
require that the employee pay the full premium cost of 
coverage.
     Those advocating private long-term care insurance as a 
solution to long-term care financing issues have argued that 
the uncertain tax treatment of long-term care insurance in the 
Tax Code has been a hindrance to market acceptance. In 
addition, tax incentives may encourage more employers to offer 
a long-term care insurance benefit and may help reduce the high 
premium costs of policies for some elderly persons. Over the 
years, numerous bills were introduced to clarify the tax 
treatment of long-term care insurance and long-term care 
expenses in the Tax Code. The substance of these proposals was 
included in Public Law 104-191, the Health Insurance 
Portability and Accountability Act of 1996, as signed into law 
August 21, 1996.
     Effective January 1, 1997, Public Law 104-191 amends the 
Tax Code to treat private long-term care policies and long-term 
care expenses the way health insurance policies and health care 
expenses are currently treated under the Code. These changes 
have several different dimensions.
 1. Amounts received under a qualified long-term care insurance 
        plan will be considered medical expenses and excluded 
        from gross income. (Per diem policies that pay benefits 
        on the basis of disability and not actual services 
        used, however, would be subject to a cap. The amount of 
        the dollar cap is $175 per day per person, indexed for 
        inflation. In the event that a person has both a per 
        diem disability policy and another policy that 
        reimburses for services actually used, then this cap 
        amount is reduced by the amount of reimbursements and 
        payments received by anyone for the cost of qualified 
        long-term care services for the chronically ill 
        individual. If more than one person receives payments 
        for services needed by the insured person, then all 
        such persons are treated as one person for purposes of 
        the dollar cap. If payments under long-term care 
        insurance plans exceed the dollar cap, then the excess 
        is excluded from income subject to taxation only to the 
        extent the individual has incurred actual costs for 
        long-term care services in excess of the dollar cap. 
        Amounts in excess of the dollar cap, with respect to 
        which no actual costs were incurred for long-term care 
        services, are fully includable in income and subject to 
        taxation.)
 2. Contributions of an employer to the cost of qualified long-
        term care insurance premiums will be excluded from the 
        gross income of the employee, and will, therefore, be 
        exempt from tax to the employee (so long as they do not 
        exceed certain annual dollar limits that vary with the 
        insured person's age). This favorable tax treatment, 
        however, is not extended to employer-sponsored 
        cafeteria plans or flexible spending arrangements. 
        (Long-term care insurance premiums paid by an employer 
        would continue to be tax deductible as a business 
        expense for the employer, as they are under current 
        law.)
 3. Out-of-pocket (i.e., unreimbursed) long-term care expenses 
        (including premium costs within age-adjusted limits) 
        will be allowed as itemized deductions, to the extent 
        they and other unreimbursed medical expenses exceed 7.5 
        percent of adjusted gross income.
 4. Self-employed individuals will be allowed to include the 
        premium costs of long-term care insurance in 
        determining their allowable deduction for health 
        insurance expenses. Only amounts not exceeding age-
        adjusted limits can be included. The deduction for 
        health insurance expenses rises from 40 percent of the 
        amount paid in 1997 to 80 percent in 2006 and years 
        thereafter.
     A qualified long-term care insurance plan is defined as a 
contract that covers only long-term care services; does not pay 
or reimburse expenses covered under Medicare; is guaranteed 
renewable; does not provide for a cash surrender value or other 
money that can be paid, assigned, or pledged as collateral for 
a loan, or borrowed; applies all refunds of premiums and all 
policyholder dividends or similar amounts as a reduction in 
future premiums or to increase 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 would be 
considered a qualified plan 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 those individuals unable to 
perform, without substantial assistance from another 
individual, at least two of six specified ADLs for a period of 
at least 90 days due to a loss of functional capacity. The six 
specified ADLs include bathing, dressing, transferring, 
toileting, eating, and continence. Furthermore, the number of 
ADLs that are taken into account under a plan may not be less 
than five of those specified above. In other words, a plan does 
not meet the definition if it requires that an individual be 
unable to perform two out of any four of the activities listed 
in the bill. Public Law 104-191 also defines chronically ill 
persons as including those having a level of disability similar 
(as determined by the Secretary of the Treasury in consultation 
with the Secretary of HHS) to the level of disability specified 
for functional impairments, as well as those requiring 
substantial supervision to protect them from threats to health 
and safety due to severe cognitive impairment. Persons are 
required to be certified by a licensed health practitioner 
within the preceding 12-month period in order to meet these 
definitional requirements.
     Public Law 104-191 also amends the Tax Code to extend 
favorable tax treatment to accelerated death benefits received 
by chronically ill persons (as defined above) and terminally 
ill persons under life insurance policies. Many life insurance 
policies now contain clauses or riders allowing part of the 
value of death benefits to be paid because of impending death 
instead of waiting until actual death. These accelerated death 
benefits are calculated based on the benefits that would be 
paid at death, discounted to the time of actual payment based 
on the projected time of death and an agreed discount rate. 
Under current tax law (i.e., before January 1, 1997), benefits 
paid because of the death of the insured are generally not 
taxable, but the proceeds from cashing in or selling a life 
insurance policy are taxable if they exceed the cost of the 
policy, just as for the sale of any asset. For the chronically 
and terminally ill, Public Law 104-191 excludes from gross 
income, and taxation, (1) amounts received as accelerated death 
benefits and (2) amounts received for the sale or assignment of 
a life insurance policy to a qualified viatical settlement 
provider, i.e., companies which are regularly engaged in the 
trade or business of purchasing or taking assignment of life 
insurance policies on the lives of insured persons who are 
chronically or terminally ill and which meet certain specified 
requirements. The exclusion is limited to payments for long-
term care services not compensated for by insurance or 
otherwise.
     In addition to Tax Code clarifications, one other 
suggestion has been offered for enhancing the affordability and 
appeal of long-term care insurance. Various States have been 
exploring an option for encouraging people to purchase 
insurance according to a level of assets they wish to protect, 
rather than according to some standard of comprehensive 
coverage. Under this approach, persons might decide, for 
example, that they wish to protect $50,000 of assets. A policy 
paying out $50,000 for incurred long-term care expenses would 
have a lower premium cost than a policy paying 4 years of 
nursing home care at $80 a day. As a result, more persons might 
be able to afford coverage. To encourage individuals to 
consider long-term care insurance as assets protection, States 
would extend to those persons buying qualified policies the 
protection of Medicaid without requiring them to deplete assets 
to levels normally required under law (generally, $2,000 for a 
single individual). These persons would be able to retain 
assets at the level that corresponds to their private insurance 
payouts and obtain Medicaid coverage for the care they need, 
after their private policies had ceased providing coverage.
     Eight States (California, Connecticut, Illinois, Indiana, 
Iowa, Maryland, New York, and Washington) have received 
approval from the Department of Health and Human Services to 
operate programs linking Medicaid and private insurance. Most 
States have implemented programs that protect a dollar of 
assets for each dollar a qualified long-term care policy pays 
out.
     What impact this approach will have on the marketability 
of private insurance for long-term care is unclear, since 
operating experience at the present time is very limited. 
States, however, hope to reduce reliance of middle-income 
elderly on Medicaid for their long-term care needs, and believe 
they will save money by delaying that point when the elderly 
would have to turn to Medicaid for protection. The linkage 
might also discourage persons from sheltering assets because 
they would have insurance, both private and public, to protect 
assets from the catastrophic expenses of nursing home care. The 
actual cost/savings experience of these programs will not be 
known for many years, since persons purchasing private 
insurance in the early years of retirement would not generally 
require services until they were 80 or older.

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