

     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
Out-of-Pocket Spending by Medicare Beneficiaries
Background Data on Long-Term Care
  The Long-Term Care Population Age 65 and Older
  Paying for Long-Term Care Services
  Medicaid Spending on Long-Term Care
  Private Long-Term Care Insurance
References

                             HEALTH STATUS

    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. 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 2 for a discussion of health
insurance supplementing Medicare coverage).
    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 17.7 years in 1997 (table B-1). 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. Improvements for
blacks have been greater than for whites; however, blacks' life
expectancy at birth was still 6 years less than that for whites
in 1997. 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 (table B-2). However, the
proportion of overweight seniors seems to be increasing. Under
the new definition for overweight that was adopted in 1998 by
the National Institutes of Health (National Heart, Lung, and
Blood Institute, 1998), the proportion of overweight seniors
has climbed from about 55 percent in the 1971-74 time period to
over 60 percent for females and over 68 percent for males in
the 1988-94 time period.

      TABLE B-1.--LIFE EXPECTANCY AT BIRTH AND AT 65 YEARS OF AGE, BY SEX AND RACE, SELECTED YEARS 1950-97
                                      [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    74.7    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    68.9
1989............................................    75.1    71.7    78.5    17.1    15.0    18.8    75.9    68.8
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............................................    76.1    73.1    79.1    17.5    15.7    19.0    76.8    70.2
1997............................................    76.5    73.6    79.4    17.7    15.9    19.2    77.1    71.1
----------------------------------------------------------------------------------------------------------------
\1\ Includes deaths of nonresidents of the United States in the 1950 and 1960 data.

Source: National Center for Health Statistics (1999a, Table 28, p. 139).

 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\..........................................     67.2     67.1     57.3     78.3     71.8     60.8
High serum cholesterol (Mean serum cholesterol level, \2\      34.7     31.7     21.9     57.7     51.6     41.3
 in mg/dL)................................................    (226)    (221)    (212)    (250)    (246)    (233)
Overweight \3\............................................     54.6     54.2     68.5     55.9     59.5     60.3
----------------------------------------------------------------------------------------------------------------
\1\ 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.
\2\ High serum cholesterol is defined as greater than or equal to 240 mg/dL (6.20 mmol/L). Risk levels were
  defined by the Second Report of the National Cholesterol Education Program Expert Panel on Detection,
  Evaluation and Treatment of High Blood Cholesterol in Adults. National Institutes of Health, September 1993.
\3\ Overweight is defined as body mass index greater than or equal to 25 kilograms/meter \2\. (In previous
  years, this table reflected a definition of overweight as body mass index greater than or equal to 27.8 for
  men and 27.3 for women, resulting in substantially lower proportions of the population being considered
  overweight.)

Note.--Data are based on measured height and weight of a sample of the civilian, noninstitutionalized
  population.

Source: National Center for Health Statistics (1999a, Tables 68, 69, 70, pp. 221-23).

    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. Almost
half report having arthritis, about 40 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 REPORTED CHRONIC CONDITIONS PER 1,000 ELDERLY PERSONS, BY AGE AND FAMILY INCOME, 1995
----------------------------------------------------------------------------------------------------------------
                                                     Age                         Family income
                                               -----------------------------------------------------------------
          Chronic condition              All             75     Less                                     $35,000
                                       elderly  65-74   and     than   $10,000-$19,999  $20,000-$34,999    and
                                                       older  $10,000                                      over
----------------------------------------------------------------------------------------------------------------
Arthritis............................     490     448    548      633          503              442          413
Cataracts............................     159     105    234      250          146              141          177
Hearing impairment...................     284     236    351      298          310              289          286
Deformity or orthopedic impairment...     178     166    193      252          196              191          149
Hernia of abdominal cavity...........      55      54     55       57           55               56           70
Diabetes.............................     126     133    117      212           98              144           94
Heart disease........................     308     268    364      333          308              335          229
High blood pressure \1\..............     403     392    420      482          432              381          328
Chronic sinusitis....................     153     157    149      188          194              156          125
Emphysema............................      34      36     32       50           36               39           21
----------------------------------------------------------------------------------------------------------------
\1\ As self-reported in the 1995 National Health Interview Survey; the higher 1988-94 hypertension data in table
  B-2 are from physical examination of a sample population.

Source: National Center for Health Statistics (1998, Table 57, pp. 77-78 and Table 60, pp. 83-86).

    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 (table B-4).
    Family income is directly related to 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 1995, about 51 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 less dependency in later life
(Kolata, 1996). It should be noted that living longer is the
demographic trend, but it is not known what the tradeoffs are
between cost of care and quality of life.

             TABLE B-4.--SELF-ASSESSED HEALTH STATUS OF THE ELDERLY, BY SEX AND FAMILY INCOME, 1995
                                                  [In percent]
----------------------------------------------------------------------------------------------------------------
                                                                              Self-assessed health status \2\
                                                              All persons --------------------------------------
                       Characteristic                             \1\                  Very
                                                              (thousands)  Excellent   good   Good   Fair   Poor
----------------------------------------------------------------------------------------------------------------
Sex:
    Men.....................................................     13,139       15.5     22.7   33.0   19.4    9.4
    Women...................................................     18,327       14.9     23.1   34.0   19.7    8.3
Family income:
    Under $10,000...........................................      4,158        8.9     20.5   29.9   26.7   13.9
    $10,000-$19,999.........................................      7,233       13.2     20.5   34.1   22.6    9.5
    $20,000-$34,999.........................................      7,363       16.1     24.0   34.3   18.1    7.5
    $35,000 and over........................................      5,738       23.3     27.7   32.3   12.3    4.4
                                                             ---------------------------------------------------
        All persons 65+ years \3\...........................     31,466       15.1     22.9   33.6   19.6    8.8
----------------------------------------------------------------------------------------------------------------
\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 (1998, Table 70, pp. 107-8).

                    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. 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 (NCHS), 1999a). In 1997,
heart disease still accounted for 35 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 1997,
cerebrovascular disease accounted for only 8 percent of all
deaths in the 65 and older age group.
    Alzheimer's disease 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. Reported death rates
increased rapidly in the first decade of reporting, as the
diagnosis gained more acceptance and as diagnostic procedures
changed. The trend in mortality leveled off from 1988 through
1992, then rose slowly from 1992 to 1995, and now seems to have
leveled off again. This pattern may mean that reporting
practices for Alzheimer's disease have stabilized (NCHS, 1999c
and NCHS, 1999b). Alzheimer's affects approximately 4 million
Americans at present, including about 1 in 10 persons over 65
(Alzheimer's Association, 1999). Some studies show that nearly
half of all people age 85 and older have some form of dementia
(National Institute on Aging, 1999). Death rates from
Alzheimer's are also highly age related (NCHS, 1999b). 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. Future morbidity and
mortality from Alzheimer's disease will increase as the
population continues to age unless new treatments or a cure are
found.

 TABLE B-5.--DEATH RATES FOR LEADING CAUSES OF DEATH AMONG OLDER PEOPLE,
                              BY AGE, 1997
            [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.....     1,781       754     1,944     6,199
   2  Malignant neoplasms.......     1,124       847     1,335     1,805
   3  Cerebrovascular diseases..       412       135       462     1,585
   4  Chronic obstructive              277       165       360       562
       pulmonary diseases.......
   5  Pneumonia and influenza...       228        57       234     1,025
   6  Diabetes..................       139        88       167       294
   7  Accidents.................        92        46       103       276
   8  Alzheimer's disease.......        65        11        73       299
   9  Nephritis, nephrotic              64        26        74       218
       syndrome, nephrosis......
  10  Septicemia................        53        23        60       178
      All other causes..........       839       358       916     2,904
                                 ---------------------------------------
      All causes................     5,074     2,510     5,728    15,345
------------------------------------------------------------------------
Source: National Center for Health Statistics (1999b, Table 7, pp. 24-
  26, and Table 8, p. 28).

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

    Tables B-6 through B-8 illustrate for selected years how
Medicare reimbursement, acute health care costs, and out-of-
pocket liabilities of Medicare enrollees respectively have
changed. The years chosen are 1975, 1980, 1985, 1990, 1995, and
2000. Constant 2000 dollar values were obtained using the
Consumer Price Index for All Urban Consumers (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 10.7 percent, while the growth in total Medicare
costs (including enrollees' share of costs) is 8.9 percent
(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 79 percent by 2000. 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 1975-2000
                                   [Incurred costs per hospital insurance or supplementary medical insurance enrollee]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Year                                                     Average annual
                              ----------------------------------------------------------------------------------------------------------  rate of growth
            Source                                                                                                                          1975-2000
                                     1975              1980              1985              1990              1995             2000          (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          In current dollars
                              --------------------------------------------------------------------------------------------------------------------------
Hospital insurance:
  Reimbursement..............  $466............  $920............  $1,570..........  $1,981..........  $3,201.........  $3,431.........  8.3
  Copayments.................  34..............  67..............  119.............  187.............  244............  273............  8.6
                              --------------------------------------------------------------------------------------------------------------------------
    Total....................  500.............  986.............  1,690...........  2,168...........  3,445..........  3,704..........  8.3
                              ==========================================================================================================================
Supplementary medical
 insurance:
  Reimbursement..............  186.............  399.............  766.............  1,307...........  1,819..........  2,378..........  10.7
  Copayments.................  84..............  137.............  248.............  400.............  547............  610............  8.3
  Balance billing............  22..............  56..............  87..............  68..............  13.............  6..............  -5.1
                              --------------------------------------------------------------------------------------------------------------------------
    Total....................  291.............  592.............  1,101...........  1,775...........  2,379..........  2,994..........  9.8
                              ==========================================================================================================================
    Total Medicare             651.............  1,318...........  2,336...........  3,288...........  5,020..........  5,809..........  9.7
     reimbursement.
                              ==========================================================================================================================
    Total costs under          792.............  1,579...........  2,791...........  3,944...........  5,824..........  6,698..........  8.9
     Medicare.
                              --------------------------------------------------------------------------------------------------------------------------
                                                                       In constant 2000 dollars
                              --------------------------------------------------------------------------------------------------------------------------
Hospital insurance:
  Reimbursement..............  1,415...........  1,908...........  2,493...........  2,588...........  3,585..........  3,431..........  3.6
  Copayments.................  105.............  138.............  189.............  245.............  273............  273............  3.9
                              --------------------------------------------------------------------------------------------------------------------------
    Total....................  1,519...........  2,046...........  2,682...........  2,833...........  3,859..........  3,704..........  3.6
                              ==========================================================================================================================
Supplementary medical
 insurance:
  Reimbursement..............  564.............  827.............  1,215...........  1,707...........  2,038..........  2,378..........  5.9
  Copayments.................  254.............  285.............  394.............  523.............  613............  610............  3.6
  Balance billing............  67..............  117.............  138.............  89..............  15.............  6..............  -9.2
                              --------------------------------------------------------------------------------------------------------------------------
    Total....................  885.............  1,229...........  1,748...........  2,319...........  2,665..........  2,994..........  5.0
                              ==========================================================================================================================
    Total Medicare             1,978...........  2,735...........  3,708...........  4,295...........  5,623..........  5,809..........  4.4
     reimbursement.
                              ==========================================================================================================================
    Total costs under          2,405...........  3,275...........  4,430...........  5,152...........  6,524..........  6,698..........  4.2
     Medicare.
                              ==========================================================================================================================
    Percent of costs paid by   82.3............  83.5............  83.7............  83.4............  86.2...........  86.7...........  0.2
     Medicare.
--------------------------------------------------------------------------------------------------------------------------------------------------------
Note.--Values after 1995 are projected; CPI-U was used to calculate constant dollars.

Source: Congressional Budget Office (2000).

    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 2000 (table B-6).
    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 86.7 percent in 2000 (table B-6). The share of costs paid
directly by enrollees is shown in the third panel of table B-7.
Total direct costs (excluding premiums) 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 2000,
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 (table B-8 for deductible amounts and
monthly premium amounts under Medicare).

                       TABLE B-7.--ENROLLEE COSTS UNDER MEDICARE, SELECTED YEARS 1975-2000
               [Incurred costs per hospital insurance or supplementary medical insurance enrollee]
----------------------------------------------------------------------------------------------------------------
                                                                 Year                                  Average
                                  ------------------------------------------------------------------ annual rate
              Source                                                                                  of growth
                                      1975       1980       1985       1990       1995       2000     1975-2000
                                                                                                      (percent)
----------------------------------------------------------------------------------------------------------------
                                                          In current dollars
                                  ------------------------------------------------------------------------------
Hospital insurance copayments....        $34        $67       $119       $187       $244       $273          8.6
Supplementary medical insurance           84        137        248        400        547        610          8.3
 copayments......................
Balance billing..................         22         56         87         68         13          6         -5.1
                                  ------------------------------------------------------------------------------
    Total direct costs...........        140        260        455        656        804        889          7.7
                                  ==============================================================================
Premium costs....................         80        110        186        343        553        546          8.0
                                  ------------------------------------------------------------------------------
    Total enrollee costs.........        221        371        641        999      1,357      1,435          7.8
                                  ==============================================================================
Enrollee per capita income \1\...      5,158      8,431     12,767     15,454     16,460     24,381          6.4
                                  ------------------------------------------------------------------------------
                                                       In constant 2000 dollars
                                  ------------------------------------------------------------------------------
Hospital insurance copayments....        105        138        189        245        273        273          3.9
Supplementary medical insurance          254        285        394        523        613        610          3.6
 copayments......................
Balance billing..................         67        117        138         89         15          6         -9.2
                                  ------------------------------------------------------------------------------
    Total direct costs...........        426        540        722        857        901        889          3.0
                                  ==============================================================================
Premium costs....................        244        229        295        448        620        546          3.3
                                  ------------------------------------------------------------------------------
    Total enrollee costs.........        670        769      1,017      1,305      1,520      1,435          3.1
                                  ==============================================================================
Enrollee per capita income \1\...     15,663     17,489     20,269     20,190     18,438     24,381          1.8
                                  ------------------------------------------------------------------------------
                                    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        4.1         -0.3
Supplementary medical insurance         10.6        8.7        8.9       10.1        9.4        9.1         -0.6
 copayments......................
Balance billing..................        2.8        3.6        3.1        1.7        0.2        0.1        -12.9
                                  ------------------------------------------------------------------------------
    Total direct costs...........       17.7       16.5       16.3       16.6       13.8       13.3         -1.2
                                  ==============================================================================
Premium costs....................       10.2        7.0        6.7        8.7        9.5        8.2         -0.9
                                  ------------------------------------------------------------------------------
    Total enrollee costs.........       27.9       23.5       23.0       25.3       23.3       21.4         -1.0
                                  ==============================================================================
Enrollee-paid costs as a percent         4.3        4.4        5.0        6.5        8.2        5.9          1.3
 of enrollee per capita income
 \1\.............................
----------------------------------------------------------------------------------------------------------------
\1\ From the Current Population Survey, with income adjusted for underreporting.

Note.--Values after 1995 are projected. The CPI-U was used to calculate constant dollars.

Source: Congressional Budget Office, unpublished tables, March 2000.

                               TABLE B-8.--COPAYMENT AND PREMIUM VALUES UNDER MEDICARE, SELECTED CALENDAR YEARS, 1975-2000
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                 Year                                                     Average annual
                              ----------------------------------------------------------------------------------------------------------  rate of growth
                                                                                                                                            1975-2000
                                     1975              1980              1985              1990              1995             2000          (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                          In current dollars
                              --------------------------------------------------------------------------------------------------------------------------
Hospital insurance:
  Hospital deductible........  $92.............  $180............  $400............  $592............  $716...........  $776...........  8.9
Supplementary medical
 insurance:
  Annual deductible..........  60..............  60..............  75..............  75..............  100............  100............  2.1
  Monthly premium \1\........  6.70............  9.20............  15.50...........  28.60...........  46.10..........  45.50..........  8.0
                              --------------------------------------------------------------------------------------------------------------------------
                                                                       In constant 2000 dollars
                              --------------------------------------------------------------------------------------------------------------------------
Hospital insurance:
  Hospital deductible........  279.............  373.............  635.............  773.............  802............  776............  4.2
Supplementary medical
 insurance:
  Annual deductible..........  182.............  124.............  119.............  98..............  112............  100............  -2.4
  Monthly premium \1\........  20.35...........  19.08...........  24.61...........  37.36...........  51.64..........  45.50..........  3.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The 1980 supplementary medical insurance monthly premium amount is the average of values for the first and second halves of the year.

Note.--Values after 1995 are projected. The CPI-U was used to calculate constant dollars.

Source: Congressional Budget Office (2000).

    Enrollees spend a slightly larger share of their income for
Medicare's cost sharing and premium charges than they did in
1975 (table B-7). 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. However, the percentage declined to 5.9 percent in
2000.

            OUT-OF-POCKET SPENDING BY MEDICARE BENEFICIARIES

    In 1995, Medicare covered approximately 55 percent of the
health care expenditures of program beneficiaries (57 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 12 percent of the
health costs of the Medicare population while private insurance
covered 9 percent and other sources (such as the Veterans
Administration) covered an additional 5 percent. (For a
discussion of supplemental coverage see section 2, Medicare.)
However, beneficiaries still financed 19 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 49 percent for prescription
drugs and 82 percent for dental care. Beneficiaries also paid
approximately 32 percent of their long-term facility care costs
out of pocket (Olin et al., 1999).
    A recent estimate projected that out-of-pocket spending by
the elderly would total about $2,430 or 19 percent of income in
1999. There is considerable variation among beneficiaries in
actual out-of-pocket costs. Over half of beneficiaries (55
percent) were projected to spend less than $2,000 in 1999.
Twenty percent were projected to spend between $2,000 and
$3,000. The remaining 25 percent would spend over $3,000.
    Payments for Medicare cost-sharing charges and items not
covered by Medicare (such as prescription drugs and dental
care) represented 54 percent of average out-of-pocket spending
in 1999. The remaining 46 percent was for premium payments for
Medicare part B, Medicare+Choice plans, and private insurance
(table B-9).

      TABLE B-9.--AVERAGE OUT-OF-POCKET SPENDING ON HEALTH CARE BY
   NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER, 1999
                               PROJECTIONS
                              [In percent]
------------------------------------------------------------------------
                            Item                               Percent
------------------------------------------------------------------------
Goods and services:
  Prescription drugs.......................................           17
  Dental...................................................            8
  Nursing home care (short-term)...........................            8
  Physician, supplier, and vision..........................           17
  Outpatient hospital......................................            3
  Inpatient hospital.......................................            3
                                                            ------------
    Total goods and services...............................           54
                                                            ============
Premiums:
  Medicare part B..........................................           19
  Private insurance (including Medicare+Choice)............           27
                                                            ------------
    Total premiums.........................................           46
                                                            ============
      Total................................................          100
------------------------------------------------------------------------
Note.--Totals do not sum due to rounding.

Source: AARP (1999).

    The average level of out-of-pocket spending varies by type
of supplemental coverage. Beneficiaries with Medigap were
projected to spend the most out of pocket, even more than those
without any supplemental protection. (Persons with Medigap
coverage also have higher Medicare costs than persons with no
supplemental protection; see Section 2). Table B-10 shows the
projected out-of-pocket costs for aged Medicare beneficiaries
by source of supplemental coverage. It also shows what this
spending represents as a percentage of income. Persons who are
either covered under the Specified Low-Income Medicare
Beneficiary Program or who have only part-year Medicaid
coverage were projected to spend the highest portion of their
incomes on health care. (For a discussion of the specified low-
income Medicare beneficiary population, see Section 2.)

      TABLE B-10.--AVERAGE OUT-OF-POCKET SPENDING ON HEALTH CARE BY
    NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER, BY
         SUPPLEMENTAL HEALTH INSURANCE STATUS, 1999 PROJECTIONS
------------------------------------------------------------------------
                                           Out-of-pocket   Percentage of
     Source of supplemental coverage           costs        income  \1\
------------------------------------------------------------------------
 Medicare-only..........................          $2,505              22
 Employer...............................           2,545              16
Medigap.................................           3,250              26
Medicare+Choice.........................           1,630              12
Medicaid................................             280               5
Qualified Medicare beneficiary \2\......             840              13
Specified low-income Medicare                      2,630              30
 beneficiary \2\/part year Medicaid.....
    All beneficiaries...................           2,430              19
------------------------------------------------------------------------
\1\ Average out-of-pocket spending as a percent of income is calculated
  as the average of each beneficiary's share of income spent out of
  pocket for health care.
\2\ Full year coverage.

Source: AARP Public Policy Institute: Out-of-Pocket Spending on Health
  Care by Medicare Beneficiaries Age 65 and Older: 1999 Projections,
  IB#41, December 1999.

    Out-of-pocket spending patterns differ considerably by
source of supplementary coverage. For example, Medicare-only
beneficiaries were projected to spend a relatively small share
of their health care goods and services dollars on prescription
drugs and dental care; the majority of their spending is for
items and services that would otherwise be covered under
supplemental coverage. Conversely, beneficiaries who have
employer-sponsored coverage are projected to spend a larger
portion of their goods and services dollars on drugs and dental
care. Medicare+Choice enrollees incur relatively low out-of-
pocket costs for both goods and services and premiums (table B-
11).
    Out-of-pocket spending tends to rise with income. However,
the share of income spent on health care falls as income rises
(table B-12). Overall, persons below 100 percent of poverty
spend 33 percent of their incomes on out-of-pocket health care
costs. However, poor persons without Medicaid coverage were
projected to spend 49 percent of their incomes out of pocket
for health care (AARP, 1999).

   TABLE B-11.--OUT-OF-POCKET HEALTH CARE SPENDING FOR NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER, BY TYPE OF SPENDING AND INSURANCE
                                                               COVERAGE, 1999 PROJECTIONS
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                              Full year
                                                                                                                                              specified
                                                                                                                       Full     Full year    low-income
                                                                     Total   Medicare  Employer  Medigap  Medicare+    year     qualified     Medicare
                                                                               only                         Choice   Medicaid    Medicare   beneficiary/
                                                                                                                               beneficiary    part year
                                                                                                                                              Medicaid
--------------------------------------------------------------------------------------------------------------------------------------------------------
Part B and private insurance premiums:
  Medicare part B premium contributions \1\.......................     $455      $465      $500     $525      $525          0          0           $160
  Private insurance/HMO premium contributions.....................      645         0       630    1,360       195        $30        $65            270
                                                                   -------------------------------------------------------------------------------------
    Subtotal of part B and private insurance premiums.............    1,100       465     1,130    1,885       720         30         65            430
                                                                   =====================================================================================
Health care goods and services:
  Inpatient hospital..............................................       65       355        35       30        35         45         25             90
  Outpatient hospital.............................................       60       175        60       45        25          5         20            210
  Physician/supplier/vision.......................................      400       655       465      415       200         65        275            400
  Nursing facility................................................      200       285       280       30       145         50        125          1,030
  Dental..........................................................      195       140       230      200       250          5        110             30
  Prescription drugs..............................................      410       430       345      645       255         80        220            440
                                                                   -------------------------------------------------------------------------------------
    Subtotal for health care goods and services...................    1,330     2,040     1,415    1,365       910        250        775          2,200
                                                                   -------------------------------------------------------------------------------------
      Average out-of-pocket spending..............................    2,430     2,505     2,545    3,250     1,630        280        840          2,630
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The average part B premium contribution represents an average premium cost over the entire year. The average contribution differs between each group
  because of differences in the number of months that each group's average enrollee was enrolled in Medicare.

Note.--Out-of-pocket health care spending excludes home care services and long-term nursing facility care. Numbers are rounded to the nearest $5.
  Numbers may not sum to total because of rounding.

Source: AARP (1999).

      TABLE B-12.--AVERAGE OUT-OF-POCKET SPENDING ON HEALTH CARE BY
 NONINSTITUTIONALIZED MEDICARE BENEFICIARIES AGE 65 AND OLDER BY INCOME
          LEVEL AND AS A PERCENTAGE OF INCOME, 1999 PROJECTIONS
------------------------------------------------------------------------
    Income level (as a percentage of                       Percentage of
                poverty)                     Spending         income
------------------------------------------------------------------------
<100 percent............................          $1,770              33
100 to <125 percent.....................           2,080              25
125 to <200 percent.....................           2,420              24
200 to <400 percent.....................           2,480              17
400 to <600 percent.....................           2,700              13
600 percent and above...................           2,605               8
All persons.............................           2,430              19
------------------------------------------------------------------------
Source: AARP (1999).

                   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 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,
getting around inside the home, and transferring from a bed to
a chair. 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, shopping, light housework, telephoning, and money
management. 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 57 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 Age 65 and Older

    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 5.3 million elderly persons
required assistance with ADLs and IADLs in 1994. This is about
16 percent of the Nation's elderly. Of this total, an estimated
3.9 million elderly persons resided in their own homes or other
community-based settings and 1.4 million elderly were residing
in nursing homes. Of the total residing in the community, 30
percent, or 1.2 million had severe disabilities, needing help
with at least 3 ADLs. The remaining 2.7 million resided in the
community with lower levels of disability (Spectur et al.,
1998).
    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. The Lewin Group, Inc. estimates show that the number
of elderly needing help with ADLs and/or IADLs may grow from
5.5 million in 2000, to 7.4 million in 2020, a 42 percent
increase.

                   Paying for Long-Term Care Services

    Table B-13 indicates that sizable public and private funds
are being spent on long-term care for the elderly--estimated at
$98 billion in 2000. Medicaid and Medicare account for the bulk
of this spending, $55 billion or 56 percent of the total.

 TABLE B-13.--ELDERLY LONG-TERM CARE EXPENDITURES BY SOURCE OF PAYMENT,
                                  2000
                        [In billions of dollars]
------------------------------------------------------------------------
                     Source of spending                         Amount
------------------------------------------------------------------------
Institutional care:
    Medicaid...............................................        $31.0
    Medicare...............................................         11.2
    Other public payors....................................        (\1\)
    Out-of-pocket payments.................................         28.2
    Long-term care insurance...............................          0.3
                                                            ------------
        Total..............................................         70.7
                                                            ============
Home and community-based care:
    Medicaid...............................................          4.9
    Medicare...............................................          8.1
    Other public payors....................................          2.8
    Out-of-pocket payments.................................         11.3
    Long-term care insurance...............................          0.2
                                                            ------------
        Total..............................................         27.3
                                                            ============
            Total long-term care...........................         98.0
------------------------------------------------------------------------
\1\ Less than $1 million.

Source: Lutzsky et al. (1999).

    Approximately 72 percent of long-term care spending on the
elderly is for institutional care. Examination of the sources
of payment for nursing home care reveals that the elderly face
significant uncovered liability for this care--an estimated 40
percent of institutional care is paid by the elderly themselves
out of pocket. Medicaid accounts for another 43 percent of
institutional care.
    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 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 costs often in excess of $50,000 per year.
    Table B-13 also indicates that nearly all private spending
for nursing home care is paid directly by consumers out of
pocket. Private insurance coverage for long-term nursing home
care is very limited, with private insurance payments estimated
to be only about 0.3 percent of total spending for nursing home
care in 2000. (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 2000, spending on
home and community-based care for the elderly is estimated to
be about $27 billion, or 27 percent of total long-term care
spending for the elderly. This spending does not take into
account the substantial support provided to the elderly by
family and friends. Research has found that about 57 percent of
functionally impaired elderly living in the community rely
exclusively on unpaid sources, generally family and friends,
for their care. Only 7 percent of the impaired residing in the
community rely totally on paid providers for care.
    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
is estimated to pay for only 15 percent of the elderly's
nursing home spending in 2000.
    For similar reasons, Medicare pays for only limited 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. Medicare's spending for
home health care for the elderly is estimated to be about 27
percent of home and community-based long-term care in 2000.
    Three other Federal programs--the Social Services Block
Grant, 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 Social
Services Block Grant 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, States devote
significant State funds to home and community-based long-term
care services. One study indicated that 39 States reported one
or more State-only funded home and community-based service
programs for the elderly in 1996. These State programs spent
more than $1.2 billion on services (Kassner and Williams).

                  Medicaid Spending on Long-Term Care

    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 persons of all ages. It funds a broad range
of long-term care services, including nursing facility care,
home health care, personal care, and various home and
community-based services.
    Table B-14 shows Medicaid spending for major long-term care
services for persons of all ages for 1990 and 1997. Medicaid
spending for long-term care almost doubled in 7 years,
increasing from $30.2 billion in 1990 to $56.8 billion in 1997.
Nursing home care accounted for the majority of Medicaid
spending on long-term care in both years, but declined slightly
as a proportion of the total over the period. In fiscal year
1997, nursing facility care represented 58 percent of total
long-term care spending; intermediate care facilities for the
mentally retarded represented 17 percent; and home and
community-based services represented almost 25 percent.

TABLE B-14.--MEDICAID SPENDING ON SELECTED LONG-TERM CARE SERVICES, 1990
                                AND 1997
                        [In billions of dollars]
------------------------------------------------------------------------
                                         1990                1997
     Long-term care services     ---------------------------------------
                                   Amount    Percent   Amount    Percent
------------------------------------------------------------------------
Nursing facility care...........     $18.4      60.9       $33      58.1
Intermediate care facilities for       7.7      25.5       9.7      17.1
 the mentally retarded..........
Home and community-based               4.1      13.6      14.1      24.8
 services \1\...................
                                 ---------------------------------------
      Total.....................      30.2       100      56.8       100
------------------------------------------------------------------------
\1\ Includes home and community-based waiver services, home and
  community-based services for the frail elderly, personal care, and
  home health services, and other community-based services.

Source: Urban Institute estimates based on data from HCFA-64 reports.

    The proportion of total Medicaid long-term care spending
for intermediate care facilities for the mentally retarded
declined over the period from 26 percent to 17 percent of long-
term care spending. This continues a trend toward
deinstitutionalization of persons with mental retardation and
developmental disabilities in favor of care in community-based
settings that began during the 1970s.
    From 1990 to 1997, the proportion of total spending devoted
to home and community-based services increased from almost 14
percent to 25 percent (from $4.1 billion in 1990 to $14.1
billion in 1997). This shift reflects, in part, greater use by
States of Medicaid waivers for home and community-based
services. Section 1915(c) of the Medicaid statute allows the
Health Care Financing Administration to waive certain statutory
requirements in order to assist States in financing care at
home and in other community-based settings for persons, who,
without these services would be in institutions. States have
flexibility to define the specific populations with
disabilities and services to be covered. A wide range of
services may be provided to persons with disabilities of all
ages, including case management, respite services for care
givers, and personal care services.
    Medicaid's spending for long-term care 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 SSI
cash welfare payment (300 percent of $512, or $1,536 per month
in 2000).
    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 considered by some to
be a promising private sector option for providing the elderly
with protection against the high cost of long-term care and/or
reliance on public sector programs such as Medicaid. Although
it is a relatively new insurance product, the market has grown
rapidly. In 1986, approximately 20 insurers were selling long-
term care insurance policies of some type, and an estimated
200,000 persons owned a policy. By 1987, a U.S. Department of
Health and Human Services (DHHS) Task Force on Long-Term Health
Care Policies found 73 companies writing long-term care
insurance policies covering 423,000 persons. As of June 1998,
the Health Insurance Association of America (HIAA) reported
that more than 5.84 million policies had been sold, with 119
insurers offering coverage (Coronel, 2000). (This is a
cumulative total of policies ever sold, not policies currently
in force.)
    Individuals who purchase long-term care insurance policies
are protected against some or all of the costs of personal care
if they become unable to carry out certain activities of daily
living such as eating, bathing, dressing, toileting,
continence, and transferring in and out of bed or a chair.
Policies may also pay for care for those with cognitive
impairments such as Alzheimer's disease. Care in a variety of
settings may be covered, including assisted living or nursing
facilities or the individual's own home. Policies vary with
regard to features such as the number of functional losses that
trigger payment of the benefit; limits on the amount of the
payments the policy will make to the caretaker or facility
(e.g., a specified dollar amount per day); whether payments are
a flat daily amount regardless of documented expenses or are
paid only as reimbursement for approved expenditures; the
length of time over which benefits are paid (such as 1 year, 3
years, or for life); a waiting period between the qualifying
impairment and commencement of payment; conditions under which
benefits may be forfeited if premium payments lapse; and
adjustment in payment amounts to account for inflation between
the time the policy is purchased and the commencement of
benefit payments.
    Long-term care insurance policies may be sold by an
insurance carrier to an individual based on that individual's
age and health-related factors, or may be sold to a group such
as employees of a firm. The policies may be priced on the basis
of substantial ``underwriting,'' meaning the carrier asks the
applicant for detailed information regarding his or her medical
history, or policies may be sold with little or no
underwriting. Underwriting is used by carriers to protect
against the ``adverse risk selection'' that could occur if
individuals were sold a policy when they were likely soon to
need long-term care.
Affordability
    One of the key issues outstanding in the debate on the role
private insurance can play in financing long-term care is
affordability. The cost an individual pays for a long-term care
insurance policy with a certain benefit package is determined
by the individual's age at the time he or she purchases the
policy. Generally, premiums remain fixed throughout the
policyholder's lifetime. (Under certain circumstances, a
carrier may raise rates for all policyholders.) The younger the
individual is when a policy is purchased, the lower the
premiums are.
    The HIAA examined the cost of 80 percent of all policies
sold in 1997 to individuals and to groups. The 1997 annual
premium cost of policies paying $100 per day for nursing home
care and $50 for home care, with lifetime 5 percent compounded
inflation protection and a 20-day deductible period were $1,850
if purchased at the age of 65, rising to $5,880 if purchased at
age 79. Many elderly individuals cannot afford to purchase
policies at such rates. Although some believe that long-term
care insurance can potentially shift long-term care costs from
the public sector to private insurers, others question the
extent to which this market will continue to expand if the
product is perceived as very costly, particularly among older
individuals who are more likely to be concerned about needing
long-term care.
Employer-based group coverage
    The insurance industry has argued that long-term care
insurance coverage could be more affordable and coverage
expanded if insurance were purchased at group rates by
individuals still in their working years. Because the premiums
for most employer-based group plans are paid by the employee
(or other covered group member) rather than by the employer,
employees are price sensitive with regard to their premiums.
Some say that because employer-based group plans may be 15 to
30 percent less costly than policies purchased individually,
focusing expansion of coverage on employer-sponsored group
policies can address the price issue (Cutler, 1999).
Employment-based group premiums are lower because: (1)
marketing can be targeted to younger individuals who generally
have lower rates; (2) savings can be achieved through lower
administrative costs and lower commissions; and (3) employers
can bargain for reduced profit percentages and improved
benefits. For example, the policy described above, which cost a
65-year-old $1,850, would cost a 50-year-old employee
purchasing it under an employer-based group plan $888 on
average.
    According to the HIAA, employer-based activity has
increased steadily over the years. By mid-1998, over 800,000
policies had been sold across 2,185 employers. These employer-
based plans may cover 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 in 1988 to a cumulative total of 345,000
in 1998.
    President Clinton proposed in 1999 that the Federal
Government, as the Nation's largest employer, set an example
for other employers and establish a long-term care insurance
program under which private group insurance would be available
to Federal workers, retirees, and certain relatives, and for
which the policyholder would pay the full cost of the premium.
Several bills were introduced in the 106th Congress to
authorize a long-term care insurance program for Federal
employees, retirees, and their relatives.
Tax qualified plans and Tax Code requirements
    The Internal Revenue Code (IRC), as amended by the Health
Insurance Portability and Accountability Act of 1996 (HIPAA,
Public Law 104-191), detailed below, sets certain standards for
qualified insurance contracts issued after December 31, 1996.
The standards include provisions in the 1993 National
Association of Insurance Commissioners' model act and model
regulations regarding reporting and disclosure of the terms and
conditions of the policies and consumer protections for
individuals purchasing a policy. Failure to meet these
requirements may result in imposition of a Federal tax penalty
on the carrier.
    The IRC requires the insurance policies to meet minimum
standards regarding the eligibility rules that trigger payment
of benefits (e.g., the inability of a ``chronically ill''
individual to perform two out of six specified ADLs for at
least 90 days, with qualified policies required to include five
of the following six specified ADLs: eating, toileting,
transferring, bathing, dressing, and continence) and the
definition of services for which benefits are payable (e.g.,
diagnostic, preventive, therapeutic kinds of services as well
as maintenance and personal care). Like payments made to
policyholders from other kinds of accident and health insurance
policies, long-term care insurance payments are not taxable
income to the policyholder if the payments are made in
accordance with the minimum eligibility and benefit rules of
the IRC. However, payment of benefits to or on behalf of an
individual who does not meet the eligibility rules (e.g., is
unable to perform only one of the listed ADLs) might result in
the benefits being taxable. (Tax-qualified policies may have
eligibility requirements that are more stringent than the
minimum standards in the IRC.)
    Individuals who itemize their deductions may deduct part or
all of their premiums for tax-qualified long-term care policies
to the extent that premium payments plus their other deductible
medical expenses exceed 7.5 percent of annual adjusted gross
income. The amount that may be deducted depends on the
policyholder's age.
HIPAA provision details
    Public Law 104-191 amended the Tax Code to treat private
long-term care insurance the way health insurance policies and
health care expenses are treated under the Code. These
amendments 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 $190 per day per person in 2000,
        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. Employer-paid premiums for qualified long-term care
        insurance policies are excluded from the gross income
        of the employee, and are, therefore, exempt from
        taxation. This favorable tax treatment, however, is not
        extended to employer-sponsored cafeteria plans or
        flexible spending arrangements. (Long-term care
        insurance premiums paid by a private 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. The age-adjusted
        limits on the amount of the annual premium that is
        deductible range in 2000 from $220 for persons age 40
        or under to $2,570 for persons over age 70. These
        limits are indexed for inflation.
 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 (regardless of whether the
        individual itemizes other deductions). 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. The tax treatment of nonqualified policies, which
some consumers may prefer because they may be more generous, is
uncertain.
    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 (the Health Insurance
Portability and Accountability Act of 1996, HIPAA) 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 DHHS) 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. 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.
Expanding coverage
    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 DHHS 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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