Health–Care Use, Expenditures, and Financing

Health-care use and expenditures tend to be concentrated among older adults. Because older adults often suffer multiple chronic conditions, they are hospitalized more frequently, use the most prescription and over-the-counter (nonprescription) drugs, make the highest number of physician visits, and require care from more physician-specialists and other health-care providers—such as podiatrists and physical therapists—than any other age group.

Nearly all older Americans have health insurance through Medicare, which covers inpatient hospitalization, outpatient care, physician services, home health care, short-term skilled nursing facility care, and hospice (end-of-life care) services. Historically, older adults' use of health-care services has changed in response to physician practice patterns, advances in medical technology, and Medicare reimbursement for services. For example, advances in medical technology and physician practice patterns have shifted many medical procedures once performed in hospitals to outpatient settings such as ambulatory surgery centers.

Another example of changes in utilization occurred during the 1980s, when the average lengths of stay (ALOS) in hospitals for Medicare patients declined in response to the introduction of prospective payment and diagnostic-related groups—methods that are used to reimburse various providers for services performed. Even though the ALOS decreased, between 1992 and 2002 the hospitalization rate increased from 306 to 361 hospital stays per 1,000 Medicare enrollees. (See Figure 10.1.)

Older adults are responsible for disproportionate health-care expenditures. The Centers for Medicare and Medicaid Services (CMS) projects that the national health expenditure will grow to $4.1 trillion by 2016. (See Table 10.1; note that because these numbers are projections, they necessarily differ from numbers presented in other tables and figures.) Medicare is projected to reach $862.7 billion by 2016, accounting for nearly 21% of all health-care expenditures.

FINANCING HEALTH CARE
FOR OLDER ADULTS

The United States is the only industrialized nation that does not have a national health-care program. In nearly all other developed countries, government national medical-care programs cover almost all health-related costs, from birth to long-term care.

In the United States the major government healthcare entitlement programs are Medicare and Medicaid. They provide financial assistance for people aged sixty-five and older, the poor, and people with disabilities. Before the existence of these programs, many older Americans could not afford adequate medical care. For older adults who are beneficiaries, the Medicare program provides reimbursement for hospital and physician care, whereas Medicaid pays for the cost of nursing home care.

MEDICARE

The spirit in which this law is written draws deeply upon the ancient dreams of all mankind. In Leviticus, it is written, "Thou shall rise up before the hoary head, and honor the face of an old man."
—Russell B. Long at the original vote for Medicare in 1965

The Medicare program, which was enacted under Title XVIII ("Health Insurance for the Aged") of the Social Security Act, was signed into law by President Lyndon B. Johnson (1908–1973) and went into effect on July 1, 1966. That year nineteen million older adults entered the program. Michelle M. Megellas forecasts in "Medicare Modernization: The New Prescription Drug Benefit and Redesigned Part B and Part C" (Proceedings (Baylor University Medical Center), January 2006) that by 2030 the number of Americans insured by Medicare will exceed seventy-eight million.

The establishment of the Medicare program in 1966 served to improve equity in health care. Before the creation of Medicare about half of the older population was uninsured, and the insured population was often limited to benefits of just $10 per day. Furthermore, because poverty rates among older adults hovered at about 30%, the older population could not be expected to pay for private health insurance. The Medicare program extended health-care coverage to a population with growing health needs and little income.

Forty-six years after its inception the Medicare program covered about half of the health-care costs of older Americans. In 2003 Medicare financed 53% of the health-care costs of older Americans. (See Figure 10.2.) Medicaid covered 9% and other payers, primarily private health insurers, covered 19%. Older adults paid 19% of their health-care costs out of pocket. Historically, Medicare payment has focused almost exclusively on acute (short-term) care services such as hospitals, physicians, and short-term rehabilitation and home health care, but in 2006 Medicare offered its first prescription drug benefits. Other public and private payers finance long-term care.

The Medicare program is composed of several parts:

• Part A provides hospital insurance. Coverage includes physicians' fees, nursing services, meals, semiprivate rooms, special care units, operating room costs, laboratory tests, and some drugs and supplies. Part A also covers rehabilitation services, limited posthospital skilled nursing facility care, home health care, and hospice care for the terminally ill.
• Part B (Supplemental Medical Insurance) is elective medical insurance; enrollees must pay premiums to get coverage. It covers private physicians' services, diagnostic tests, outpatient hospital services, outpatient physical therapy, speech pathology services, home health services, and medical equipment and supplies.
• A newer, third part of Medicare, sometimes known as Part C, is the Medicare Advantage program, which was established by the Balanced Budget Act of 1997 to expand beneficiaries' options and allow them to participate in private-sector health plans.

• Part D, the Medicare prescription drug benefit, was enacted after Congress passed the Prescription Drug, Improvement, and Modernization Act of 2003.

According to the CMS (January 8, 2007, http://www.cms.hhs.gov/NationalHealthExpendData/02_NationalHealthAccountsHistorical.asp#TopOfPage), in 2005 over $342 million was spent to provide coverage for the more than forty-two million people enrolled in Medicare.

Most Medicare recipients were aged sixty-five and older; more than half of these older adults were between the ages of sixty-five and seventy-four; a third were between the ages of seventy-five and eighty-four; and about 12% were eighty-five and older. In 2004 CMS Statistics (October 2004, http://www.cms.hhs.gov/CapMarketUpdates/Downloads/2004CMSstats.pdf), the CMS estimates that by 2050 nearly eighty-one million people aged sixty-five and older will be eligible for Medicare; of those, fifteen million will be eighty-five or older.

Reimbursement under Medicare

In general, Medicare reimburses physicians on a fee-for-service basis (paid for each visit, procedure, or treatment delivered), as opposed to per capita (per head) or per member per month. In response to the increasing administrative burden of paperwork, reduced compensation, and delays in reimbursements, some physicians opt out of Medicare participation—they do not provide services under the Medicare program and choose not to accept Medicare patients into their practices. Others continue to provide services to Medicare beneficiaries, but they do not "accept assignment"—that is, their patients must pay out of pocket for services and then seek reimbursement from Medicare.

The Tax Equity and Fiscal Responsibility Act of 1982 authorized a "risk managed care" option for Medicare, based on agreed-on prepayments. Beginning in 1985, CMS could contract to pay health-care providers, such as health maintenance organizations (HMOs) or other prepaid plans, to serve Medicare and Medicaid patients. These groups were paid a predetermined amount per enrollee for their services. These became known as Medicare-risk HMOs.

During the 1980s and 1990s the federal government, employers that provided health coverage for retiring employees, and many states sought to control costs by encouraging Medicare and Medicaid beneficiaries to enroll in Medicare-risk HMOs. Medicare-risk HMOs kept costs down because, essentially, the federal government paid the health plans that operated them with fixed fees—a predetermined dollar amount per member per month (PMPM). For this fixed fee, Medicare recipients were to receive a fairly comprehensive, preset array of benefits. The PMPM payment provided a financial incentive for Medicare-risk HMO physicians to control costs, unlike physicians who were reimbursed on a fee-for-service basis.

Even though Medicare recipients were generally satisfied with these HMOs (even when enrolling meant they had to change physicians and thereby end long-standing relationships with their family doctors), many of the health plans did not fare as well. The health plans suffered for a variety of reasons: some plans had underestimated the service utilization rates of older adults, and some were unable to provide the stipulated range of services as effectively as they were intended. For other plans, the PMPM payment was simply not sufficient to enable them to cover all the clinical services and their administrative overhead.

Regardless, the health plans providing these "senior HMOs" competed fiercely to market to and enroll older adults. Some health plans feared that closing their Medicare-risk programs would be viewed negatively by employer groups, which, when faced with the choice of plans that offered coverage for both younger workers and retirees or one that only covered the younger workers, would choose the plans that covered both. Despite losing money, most health plans maintained their Medicare-risk programs to avoid alienating the employers they depended on to enroll workers who were younger, healthier, and less expensive to serve than the older adults.

About ten years into operations, some Medicare-risk programs faced a challenge that proved unbeatable. Their enrollees had aged and required even more health-care services than they had previously. For example, a senior HMO member who had joined as a healthy sixty-five-year-old could now be a frail seventy-five-year-old with multiple chronic health conditions requiring many costly health-care services. Even though the PMPM had increased over the years, for some health plans it was simply insufficient to cover their costs. Many health plans, especially the smaller ones, were forced to end their Medicare-risk programs abruptly, leaving thousands of older adults scrambling to join other health plans. Others have endured, offering older adults comprehensive care and generating substantial cost savings for employers and the federal government.

Medicare Advantage

The Balanced Budget Act of 1997 produced another plan for Medicare recipients—which took the place of the Medicare-risk plans—called Medicare+Choice, which later became known as Medicare Advantage. These plans offer Medicare beneficiaries a wider range of managed care plan options than just HMOs—older adults could join preferred provider organizations and provider-sponsored organizations that generally offer greater freedom of choice of providers (physicians and hospitals) than what is available through HMO membership.

When older adults join Medicare Advantage plans that have entered into contracts with the CMS, the plans are paid a fixed amount PMPM, which represents Medicare's share of the cost of the services. The attraction of these plans is that members no longer have to pay the regular Medicare deductibles and copayments for Medicare-covered services. Some plans charge modest monthly premiums, and/or nominal copayments as services are used, but there are no other charges by the plan for physician visits, hospitalization, or use of other covered services. However, members of Medicare Advantage plans must continue to pay the Medicare Part B monthly premium.

In the press release "Medicare Drug Plans Strong and Growing" (January 30, 2007, http://www.aoa.gov/medicare/news/media/Final_Enrollment_Numbers.pdf), the CMS notes that by 2007 these plans enrolled 8.3 million Medicare beneficiaries and that enrollment varied widely based on geography.

Insurance to Supplement Medicare Benefits

In 2003, 11.3 million (35.9%) older adults had private insurance obtained through the workplace to supplement their Medicare coverage. (See Table 10.2.) The most popular private insurance is supplemental insurance known as Medigap insurance. Federal regulations mandate that all Medigap policies sold offer a standard minimum set of benefits, but there are ten standard variations that offer additional coverage and benefits.

Besides Medigap policies, older adults may also purchase Medicare supplement health insurance called Medicare SELECT, which offers essentially the same coverage as Medigap policies, but it requires use of preferred providers—specific hospitals and in some cases plan physicians—to receive full benefits. Even though Medicare SELECT policies restrict older adults' choices, they are generally less expensive than Medigap policies.

A less popular option is hospital indemnity coverage—insurance that pays a fixed cash amount for each day of hospitalization up to a designated number of days. Some coverage may have added benefits such as surgical benefits or skilled nursing home benefits. Most policies have a maximum annual number of days or a lifetime maximum payment amount.

The Prescription Drug, Improvement,
and Modernization Act of 2003

Congress passed the Prescription Drug, Improvement, and Modernization Act of 2003, which represents the largest expansion of Medicare since its creation in 1965. The legislation established a Medicare prescription drug benefit. The benefit was phased in and took full effect in January 2006. Among other things, it provides help for low-income beneficiaries and those with the highest drug costs. It also contains some measures to help keep prescription drugs affordable and includes $88 billion in subsidies to maintain current employer-provided coverage.

Medicare Prescription Drug Coverage

Enrollees in the Medicare prescription drug program, called Part D, pay a monthly premium, which varies by plan, and a yearly deductible that in 2007 was no more than $265. They also pay a part of the cost of their prescriptions, including a copayment or coinsurance. Costs vary among the different drug plans—some plans offer more coverage and access to a wider range of drugs for a higher monthly premium. Older adults with limited incomes may not have to pay premiums or deductibles for the drug coverage.

In "Medicare Drug Plans Strong and Growing," the CMS estimates that thirty-nine million Medicare beneficiaries had prescription drug coverage in 2006. Nearly twenty-four million (61%) were enrolled in Part D, seven million (18%) had coverage through an employer or union, and another eight million (20%) had coverage from another source.

After One Year the Medicare Drug Benefit Earns Mixed Reviews

In Seniors and the Medicare Prescription Drug Benefit (December 2006, http://www.kff.org/kaiserpolls/upload/7604.pdf), which reports on the November 2006 survey conducted by the Kaiser Family Foundation and the Harvard School of Public Health, older adults', pharmacists', and physicians' views of, and experiences with, the Medicare drug benefit are examined. Not surprisingly, the survey finds that 56% of those enrolled in a Medicare drug plan felt more favorably about the benefit, compared to just 32% of people not enrolled in a

Medicare drug plan who held a favorable impression of the benefit. The survey also finds that 51% of respondents felt the drug benefit was too complicated and 41% thought it benefited health plans and pharmaceutical companies too much. Interestingly, even more physicians (92%) and pharmacists (91%) than adults aged sixty-five and older (73%) agreed that the drug benefit is too complicated.

When asked about the message they would "send to policymakers in Washington regarding the new Medicare drug benefit," just 12% of survey respondents felt that Medicare Part D is working well, 41% said it could be improved with some minor changes, 28% felt the benefit is not working well and needs major changes, and 10% said it is not working well and should be repealed. The changes the respondents proposed included:

• Allowing the government to negotiate with drug companies for lower prices for Medicare prescription drugs (67%).
• Waiving the penalty for late enrollment so seniors can learn more about the drug benefit before they decide whether or not to enroll (58%).
• Spending more federal money to get rid of the existing coverage gap (46%).
• Allowing seniors the option of getting a prescription drug plan directly from Medicare (45%).
• Simplifying the new benefit by reducing the number of available plans (44%).

Medicare Faces Challenges

Like Social Security, the Medicare program's continuing financial viability is in jeopardy. Every year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of both programs. This section reviews the origins of the challenges Medicare faces and the findings of the 2007 annual report.

A NATIONAL BIPARTISAN COMMISSION CONSIDERS THE FUTURE OF MEDICARE.

The National Bipartisan Commission on the Future of Medicare was created by Congress in the Balanced Budget Act of 1997. The commission was charged with examining the Medicare program and drafting recommendations to avert a future financial crisis and reinforce the program in anticipation of the retirement of the baby boomers (people born between 1946 and 1964).

The commission observed that like Social Security, Medicare would suffer because there would be fewer workers per retiree to fund it. (See Figure 10.3.) It predicted that beneficiaries' out-of-pocket costs would rise and forecasted soaring Medicare enrollment. (See Figure 10.4.) Perhaps the direst prediction was the commission's determination that, without reform, the Medicare Part A fund would become bankrupt in 2008. (See Figure 10.5.)

When the commission disbanded in March 1999, it was unable to forward an official recommendation to Congress because the plan it proposed fell one vote short of the required majority needed to authorize an official recommendation. The plan would have changed Medicare into a premium system, where instead of Medicare directly covering beneficiaries, the beneficiaries would be given a fixed amount of money to purchase private health insurance. The plan would have also raised the age of eligibility from sixty-five to sixty-seven, as has already been done with Social Security, and provided prescription drug coverage for low-income beneficiaries, much like the Medicare Prescription Drug, Improvement, and Modernization Act of 2003.

THE MEDICARE PRESCRIPTION DRUG, IMPROVEMENT, AND MODERNIZATION ACT AIMS TO REFORM MEDICARE.

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 is a measure intended to introduce private-sector enterprise into a Medicare model in urgent need of a reform. Under the act, premiums and deductibles may rise quickly, because they are indexed to the growth in per-capita Medicare expenditures. For example, Stacey L. Bradford notes in "Breaking Down Medicare Reform (Update)" (May 24, 2004, http://finance.comcast.net/personalfinance/view.html?x=consumer/20040524) that the deductible for Medicare Part D is estimated to increase from $250 to $445 by 2013, and that the threshold for drug coverage that covers 95% of expenses is expected to rise from $5,100 to $9,066.

Older adults with substantial incomes will face increasing premium costs. According to the Social Security Administration (SSA), in Medicare Part B Premiums: Important Information for People Newly Eligible for Medicare (October 2006, http://www.ssa.gov/pubs/10162.pdf), beginning in 2007 older adults with annual incomes of $80,000 to $100,000 (or couples earning $160,000 to $200,000) paid 35%; those earning between $100,000 and $150,000 ($200,000 to $300,000 for couples) paid 50%; those earning $150,000 to $200,000 ($300,000 to $400,000 for couples) paid 65%; and anyone earning more than $200,000 ($400,000 for couples) paid 80% of the premium cost.

The act also expanded coverage of preventive medical services. According to the CMS, new beneficiaries receive a free physical examination along with laboratory tests to screen for heart disease and diabetes. The act also provided employers with $89 billion in subsidies and tax breaks to help offset the costs associated with maintaining retiree health benefits.

Medicare's Problems May Be More Urgent Than Those of Social Security

Medicare costs forecasts show them outpacing Social Security costs because it is anticipated that per capita health-care costs will continue to grow faster than the per capita gross domestic product (GDP; total value of goods and services produced by the United States) in the future. The 2007 annual report projects that Medicare expenditures will increase from 3.2% of the GDP in 2007 to 6.5% in 2030, and to 11.3% by 2080. (See Figure 10.6.) The SSA indicates in Status of the Social Security and Medicare Programs: A Summary of the 2007 Annual Reports (April 23, 2007, http://www.ssa.gov/OACT/TRSUM/trsummary.html) that if reforms to sharply control these cost increases are not implemented, then both taxes on workers and out-of-pocket payments from beneficiaries will have to rise much more quickly than incomes in the decades ahead.

MEDICAID

Medicaid was enacted by Congress in 1965 under Title XIX ("Grants to States for Medical Assistance Programs") of the Social Security Act. It is a joint federal-state program that provides medical assistance to selected categories of low-income Americans: the aged, people who are blind and/or disabled, or families with dependent children. Medicaid covers hospitalization, physicians' fees, laboratory and radiology fees, and long-term care in nursing homes. It is the largest source of funds for medical and health-related services for the United States' poorest people and the second-largest public payer of health-care costs, after Medicare.

In 2002 Medicaid provided coverage for 10.4%—3.3 million—of adults aged sixty-five and over. (See Table 10.2.) Older Medicaid recipients were more likely to be female (12.9%) than male (7.3%). Thirty percent of older Medicaid recipients were African-American and 28.4% were of Hispanic origin.

Brian Burwell, Kate Sredl, and Steve Eiken report in "Medicaid Long-Term Care Expenditures in FY 2005" (July 5, 2006, http://www.ancor.org/issues/medicaid/medicaid_ltc_expenditures_fy05_07-06-06.pdf) that Medicaid long-term care expenditures in fiscal year 2005 totaled $94.5 billion, approximately 32% of total Medicaid expenditures of $300.3 billion. Long-term care expenditures increased by 3.8% from 2004. Medicaid spending for nursing home expenditures increased 2.9% in 2005, from $45.9 billion to $47.2 billion. Expenditures for services provided in intermediate care facilities rose 0.6%, from $12 billion to $12.1 billion.

Medicaid is the largest third-party payer of long-term care in the United States, financing about one-half of all nursing home care. Expenditures for community-based long-term care services continued to increase in 2005. According to Burwell, Sredl, and Eiken, total home and community-based services increased by 6.1%, to $35.2 billion. Expenditures for Medicaid home health-care benefits increased 3.6%, to $3.6 billion, and expenditures under the Medicaid personal care services benefit increased 8.9%, to $8.6 billion. This trend is expected to persist as Medicaid programs continue to invest more resources in alternatives to institutional services.

VETERANS' BENEFITS

People who have served in the U.S. military are entitled to medical treatment at any veterans' facility in the nation. In "Veteran Demographics, Estimates, and Projections" (May 14, 2007, http://www1.va.gov/vetdata/docs/VP2004B.htm), the U.S. Department of Veterans Affairs indicates that between 2007 and 2030 the total veteran population is projected to decline by 36%, from 23.5 million to 15.1 million. However, this projection may change as a result of the current armed conflicts. During this same period the number of veterans over the age of sixty-five will decline from 9.1 million to 6.9 million. Throughout this period the number of veterans aged eighty-five and older is expected to increase steadily and significantly to reach 1.1 million by 2030.

The number of veterans aged sixty-five and older that received health care from the Veterans Health Administration (VHA) increased steadily from 1990 through 2004. This increase may in part be attributable to the fact that VHA benefits cover services not covered by Medicare, such as prescription drugs (Medicare coverage began in 2006), mental health care, long-term care (nursing home and community-based care), and specialized services for people with disabilities. In 2004 approximately 2.3 million veterans aged sixty-five and older received health care from the VHA. (See Figure 10.7.) An additional 1.1 million older veterans were enrolled to receive health care but did not use services in 2004.

LONG-TERM HEALTH CARE

The options for quality, affordable long-term care (LTC) in the United States are limited but improving. Nursing home costs range from $50,000 to $75,000 per year, depending on services and location. In The Mature Market Survey of Nursing Home and Home Care Costs (September 2006, http://www.metlife.com/WPSAssets/18756958281159455975V1F2006NHHCMarketSurvey.pdf), MetLife notes that in 2006 nursing home care cost an average of $75,190 per year for a private room. Many nursing home residents rely on Medicaid to pay these fees. In 2003 Medicaid covered 48% of nursing home costs for older Americans. (See Figure 10.2.) The second most common source of payment at admission is private insurance, the prospective resident's own income, or family support, followed by Medicare (which only pays for short-term stays after hospitalization). The primary source of payment changes as a stay lengthens. After their funds are "spent down," nursing home residents on Medicare shift to Medicaid.

Even though nursing home care may seem cost prohibitive, an untrained caregiver who makes home visits can cost more than $25,000 a year, and skilled care costs much more. MetLife reports in the Mature Market Survey that in 2006 the average hourly rate for a home health aide was $19 per hour and homemakers/companions earned an average of $17 per hour.

The National Clearinghouse for Long-Term Care Information (May 25, 2007, http://www.longtermcare.gov/LTC/Main_Site/index.aspx) reports an even higher average cost for a home health aide: $25 per hour in 2006. Many older adults cannot afford this expense and may exhaust their lifetime savings long before the need for care ends.

The Future of Spending for Long-Term Care

According to Andy Schneider, Jeanne Lambrew, and Yvette Shenouda, in Medicaid Cost Containment: The Reality of High-Cost Cases (June 2005, http://www.americanprogress.org/kf/medicaid_cost_containment.pdf), the Congressional Budget Office (CBO) predicts that Medicaid spending will increase an average of 7% per year, from $183 billion in 2005 to $260 billion in 2010, when Medicaid will provide health or LTC coverage to over fifty-eight million people.

Long term, the CBO also projects that the population over age eighty-five, those most likely to require LTC, will more than triple by 2040. (See Figure 10.8.) Even though disability rates among older adults have declined in recent years, reducing somewhat the need for LTC, the CBO projects that spending for LTC will grow by more than 2.5 times by 2040, reaching $346 billion (in inflation-adjusted dollars) for the older population alone.

Who Pays for Long-Term Care?

Payment for LTC is derived from three major sources: Medicaid, private insurance (LTC insurance), and out-of-pocket spending. As Figure 10.9 shows, the proportions of the contributions vary depending on whether the older adult receives formal or informal care. For example, without informal care, out-of-pocket payments account for 33% of spending, compared to 21% for older adults receiving informal care from relatives or friends.

In a statement before the Subcommittee on Health in the U.S. House of Representatives, Douglas Holtz-Eakin (April 19, 2005, http://www.cbo.gov/ftpdoc.cfm?index=6294 type=0), the director of the CBO, stated that in 2004 out-of-pocket expenditures accounted for about one-fifth of total LTC expenditures, or about $5,000 per older adult. The federal government reduces the cost of some LTC through the tax code's treatment of certain LTC expenses. The Health Insurance Portability and Accountability Act of 1996 allows a taxpayer (or his or her dependent) who incurs such expenses and has a specified degree of physical or cognitive impairment to deduct them from taxable income along with other medical costs. Qualifying expenses include payments for nursing home care; home care services; medical equipment and supplies, such as oxygen, wheelchairs, and walkers; and home modifications, such as the installation of grab bars in the shower.

Medicare, Medicaid, and Long-Term Care

Medicare does not cover custodial or long-term nursing home care but, under specific conditions, will pay for short-term rehabilitative stays in nursing homes and for some home health care. Medicaid is the only public program with LTC coverage.

Medicaid, however, does not work like private insurance, which offers protection from catastrophic expense. Medicaid is a means-tested program, so middle-income people needing nursing home care become eligible for Medicaid only after they spend down their own personal income and assets ($2,000 for a single person and $3,000 for couples).

Even then, Medicaid will not necessarily pay the entire nursing home bill. Nursing home residents must also meet income eligibility standards. In some states older adults with incomes too high for regular Medicaid eligibility, but with substantial medical bills, are allowed to spend down to become income-eligible for Medicaid. They must incur medical bills until their income for a given period, minus the medical expenses, falls below the Medicaid threshold.

Even though every state's Medicaid program covers LTC, each has made different choices about the parameters of its program. Eligibility rules and protection for the finances of spouses of nursing home residents vary widely, but federal law requires states to allow the community spouse to retain enough of the institutionalized spouse's income to maintain a monthly allowance for minimum living costs. The allowance is set by the state according to federal guidelines—in 2007 no less than $1,650 per month and no more than $2,541. The community spouse is also allowed to retain joint assets—an amount equal to one-half of the couple's resources at the time the spouse enters the institution, up to a federally specified maximum ($101,640 in 2007).

Figure 10.2 shows the breakdown of LTC expenditures for older adults by the source of payment. In 2004 Medicaid paid the largest proportion of institutional expenses (48%), but nearly the same proportion (45%) was paid out of pocket. Medicare paid for just 1% of LTC. Medicare made the largest contribution (83%) toward home care services, whereas Medicaid paid just 1% and 10% of services were paid out of pocket.

Private Long-Term Care Insurance

Another source of financing is LTC insurance. Private LTC insurance policies typically cover some portion of the cost of nursing home care and home health-care services. In "Long-Term Care Insurance a Tough Sell" (Ledger Online, May 7, 2007), Cory Reiss states that in 2007 about 10% of people fifty-five and older had LTC insurance and that annual sales of these policies have declined since 2002.

LTC insurance premiums take into account the cost of services and the risk that policyholders will need LTC as they age. According to the American Association of Homes and Services for the Aging (June 18, 2007, http://www.aahsa.org/aging_services/default.asp), in 2007 the average LTC premium for people under age sixty-five was $1,337 per year and for people over sixty-five it was $2,862. The lower premiums offered to younger people assume that their risk of requiring LTC services is low and that they will pay premiums over a longer period than will people who obtain LTC insurance when they are older.

Typically, LTC insurance policies pay for nursing home care and home care but stipulate a maximum daily benefit such as $100 or $150, as well as a pre-established maximum lifetime amount. Policies with inflation protection increase the dollar value of their benefits by a contractually specified percentage each year, usually 5%.

Premiums for private LTC insurance are tax deductible. The tax benefit is limited to taxpayers who itemize deductions and whose total medical and dental expenditures exceed 7.5% of their adjusted gross income.

HOME HEALTH CARE

The National Center for Health Statistics (January 11, 2007, http://www.cdc.gov/nchs/about/major/nhhcsd/nhhcsdes.htm) describes home health care as "provided to individuals and families in their places of residence for the purpose of promoting, maintaining, or restoring health or for maximizing the level of independence while minimizing the effects of disability and illness, including terminal illness." Medicare and Medicaid spending for home health care have increased steadily since 2000 and the CBO projects steady growth in spending through 2014.

Community Housing with Home Care Services

Some older adults have access to a variety of home care services through their place of residence. Assisted living facilities, retirement communities, and continuing care retirement facilities are community housing alternatives that often provide services such as meal preparation, laundry and cleaning services, transportation, and assistance adhering to prescribed medication regimens.

In 2003 just 3% of Medicare recipients aged sixty-five and older lived in community housing that offered at least one home care service, and an additional 4% lived in LTC facilities. (See Figure 10.10.) The percentage of people residing in community housing that offered home care services was higher in the older age groups. Among people aged eighty-five and older, 8% lived in community housing with services, and 17% lived in LTC facilities.

Older adults living in community housing with support services had more functional limitations than those living in the community but fewer than residents of LTC facilities. Approximately 19% of older adults living in community housing with services had three or more activity of daily living limitations, compared to 9% of older adults living in the community and 66% of older adults in LTC facilities. (See Figure 10.11.)