Initial Recommendations to Improve the Financing of Long-Term Care

Monday, February 1, 2016

In April 2014, the Bipartisan Policy Center (BPC) released a report on long-term care, America’s Long-Term Care Crisis: Challenges in Financing and Delivery. That report outlined the roles of Medicaid, private insurance, personal savings, and direct unpaid care provided by friends and family members in long-term services and supports (LTSS), and it raised concerns about the sustainability of these financing mechanisms. Specifically, the report noted that the demand for LTSS will more than double over the next 35 years and is fiscally unsustainable.

Over the years, federal policymakers have attempted to advance comprehensive proposals to address the need for, and financing of, LTSS for older Americans and individuals with disabilities. Although those efforts have proved unsuccessful—the most recent was one of the few parts of the Patient Protection and Affordable Care Act that was repealed—Congress has enacted incremental efforts over the years. These efforts include legislation to improve care for low-income individuals who meet the eligibility criteria to qualify for Medicaid, and for middle-income individuals who exhaust their personal or retirement savings to qualify for LTSS under the Medicaid program. While some states have taken advantage of new opportunities to expand the availability of LTSS under Medicaid, others have not. This has resulted in significant variation in eligibility and benefits from state to state.

Congress has sought to encourage individuals to purchase private long-term care insurance (LTCI) by providing tax benefits for those who purchase policies that meet certain standards. The rationale for expanding private LTCI is to improve financial security for older individuals and to reduce or delay future reliance on Medicaid for middle- to upper-income individuals. Despite those efforts, sales of private LTCI continue to fall, largely because premiums are unaffordable and the traditional product design has proved to be unsustainable for carriers.

This report offers initial recommendations to help address the financing of LTSS. In late 2016 or early 2017, BPC will release additional recommendations for new approaches to finance LTSS and also to reform LTSS delivery and improve integration of care for persons with multiple chronic conditions and functional limitations.


As stated in the Long-Term Care Initiative’s 2014 report, LTSS refer to the range of clinical health and social services that assist individuals who are limited in their ability to care for themselves. These individuals include those with physical, cognitive, developmental, or other chronic health conditions. They often have difficulty performing one or more activities of daily living, which include bathing and dressing, and instrumental activities of daily living, such as medication management and house cleaning. LTSS are provided in institutional settings, which include nursing facilities and residential facilities, and through home and community-based services.

Cost of Long-Term Services and Supports

Regardless of setting, the cost of services can be significant, which is why many state and federal policymakers have been reluctant to take on the issue of financing LTSS. For example, in 2014 the average annual cost for a home health aide was approximately $45,800, the cost for community-based adult day-care centers was on average $16,900 per year, and the average annual cost to live in a nursing facility was approximately $87,600. In 2013, national spending for formal LTSS (i.e., services from a paid provider) was about $310 billion, with Medicaid spending accounting for about $123 billion (51 percent) of this amount. Formal LTSS spending for older Americans (65 years and up) was approximately $192 billion in 2011.

The cost of providing services is estimated to rise, taking up a larger portion of federal and state budgets under the Medicaid program, and will significantly impact families’ savings. According to the Congressional Budget Office, spending by the federal government, states, and individuals on formal LTSS for those aged 65 and older will increase from 1.3 percent of GDP in 2010 to 3 percent of GDP in 2050. Data on current and projected LTSS spending for individuals under age 65 is limited. One estimate puts Medicaid spending for LTSS for the under-65 population at approximately $67 billion in fiscal year 2010, or about 0.5 percent of GDP in that year.

A significant number of individuals receive unpaid LTSS from caregivers who are family members or friends. While many people who engage in caregiving consider it rewarding, caregiving takes a toll on the caregiver in terms of physical and mental health, missed work time, and forgone retirement savings. Caregivers often must leave the labor market, forgoing income or incurring significant expense in providing care and eroding their ability to accumulate resources for their own retirement or future long-term care needs. Given these complexities, unpaid care is often a complement to, but not a complete replacement for, paid care. Valuing unpaid care is difficult and inherently uncertain. As such, most data do not reflect the cost of the unpaid care being provided to individuals by friends and family members. However, some estimates put the total economic value of unpaid caregiving at about $470 billion in 2013.

Utilization of LTSS

About 12 million Americans are in need of LTSS. Approximately 70 percent of Americans aged 65 and over will need LTSS at some point in their lives, with women aged 65 and over needing services for an average of 2.5 years compared with about 1.5 years for men. Just over half of individuals aged 65 and over will have a high level of LTSS need, meaning that they will need help with two or more activities of daily living for at least 90 days or will have severe cognitive impairment. About 14 percent will have a high level of LTSS that lasts for five years or more. Of the 52 percent of individuals aged 65 and over who will have a high level of LTSS need, the average duration of LTSS need is about 3.9 years, with women averaging 4.4 years, and 3.2 years for men.

Amount and Distribution of LTSS Spending per Person

There is notable variation in LTSS spending among individuals. While roughly half of individuals turning 65 today will not have any LTSS expenditures, others will have very high spending. Approximately 6 percent will have expenditures greater than zero but under $10,000. On the other hand, about 27 percent will have LTSS costs of at least $100,000 over the course of their lifetimes, and costs will exceed $250,000 for about 15 percent. These expenditures are paid for in various ways. Individuals and their families pay for about 53 percent of their total LTSS expenditures out-of-pocket. The states and the federal government pay for about 34 percent of total LTSS expenditures through the Medicaid program. Other public programs, such as benefits available to veterans, cover about 10 percent of total LTSS expenditures, and private long-term care insurance (LTCI) accounts for less than 3 percent of expenditures.

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