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WebMemo #875 on Health Care

October 6, 2005

The Looming Problem of Long-Term Care and Medicaid Spending

By

In 2008, the oldest of the baby boomers will turn 62, become eligible for Social Security benefits, and begin to retire en masse. As the retired population swells, so will the number of seniors living in nursing homes and other long-term care facilities. Because the Medicaid program often pays for these long-term care services, the aging of the baby boomers will weigh heavily on Medicaid's budget and the federal budget. The Medicaid Commission, which is considering the issue of long-term care, needs to come up with a way to promote private long-term care insurance. Staying the course is unsustainable.

 

Demographic Trends Among the Elderly

The U.S. Census Bureau estimated last year that there were nearly 36.4 million seniors (those over age 65) in the United States, making up 12.4 percent of the population.[1] As the baby boomers begin to retire, not only will the total number of elderly swell, but their proportion of the population will also increase.

 

By 2030, the number of seniors in the United States will nearly double to 71.5 million while the total population increases by only 23.8 percent.[2] Put differently, the elderly population will grow four times faster than the overall U.S. population over the next 25 years. Meanwhile, the working-age population will grow by slightly more than 12 percent during that time period.

 

Table 1

 

Medicaid Expenditures on Long-Term Care

A recent report for the U.S. Department of Health and Human Services described Medicaid's role in long-term care:

 

The Medicaid program is the largest publicly funded source of long-term care coverage in the nation. Over the last several years, an increasing percentage of those who enter long-term care (LTC) facilities, as well those who receive home care on a long-term basis, have had a substantial portion of their costs paid for by the Medicaid program.[3]

 

Nearly 1.6 million seniors live in nursing homes, according to the Census Bureau.[4] Medicaid pays for nearly half of all nursing home care in the United States, and its share of the cost of long-term care is growing.[5] In 1968, for example, Medicaid covered only 24 percent of total nursing home expenditures.[6]

 

Roughly 4.4 percent of the elderly population lives in nursing homes. Nursing home care is a $100 billion per year industry, with about 90 percent of its services consumed by the elderly.[7] The total expenditure on nursing home care per elderly resident is about $52,000 per year, on average, and Medicaid pays for nearly $25,000 of that, on average.

 

A straight-line projection of Medicaid expenditures in light of these demographic data illustrates the coming challenge. Increased expenditures on long-term care will add $44 billion annually to the cost of Medicaid by 2030.

 

Table 2

 

This analysis assumes that the proportion of elderly living in nursing homes remains at the current level, but this may be an overly optimistic assumption. The number of seniors who are 85 or older will grow by 4.7 million between 2004 and 2030, and members of this group will be far more likely to need long-term care than younger seniors.[8] Thus, this paper's projection of the cost of long-term care probably understates the problem.

 

Bad Incentives

The elderly know that Medicaid covers nursing home expenses for patients who have few or no assets, which in many cases can be shifted to relatives before entering a long-term care facility.[9] That the federal government has been paying an increasing share of the bill for long-term care should be no surprise, given this incentive structure.

 

Long-term care is one of several entitlement issues that threaten to greatly expand the federal budget. Private long-term care insurance could alleviate this problem, but few Americans will purchase long-term care insurance when the federal government is willing to pick up the tab. Without a greater role for the private market, Medicaid's spending on long-term care will skyrocket. The effect on federal spending, taxes, and other government programs will be severe.

 

Old-age nursing home care has quickly become a de facto middle-class entitlement. As Medicaid's long-term care expenditures continue to grow, they will inevitably crowd out funding for the those who need health care services and are unable afford them. If nothing is done, growing middle-class entitlements, including Medicaid, could shred the safety net for the poor.

 

The Commission and Congress

The Medicaid Commission, chaired by former Tennessee Governor Donald Sundquist, is developing proposals to ensure the program's long-term sustainability. Thankfully, long-term care issues are on the list of issues being considered.

 

The Commission should focus on how to encourage individuals to purchase long-term care insurance in the private market. Such insurance policies have been widely available only since the 1980s, and many consumers are unfamiliar with them.[10] Part of the solution will be consumer education about how long-term care contracts work, how to evaluate competing offerings, and how and when to purchase a policy.

 

In his 1999 State of the Union Address, President Bill Clinton warned of the coming "senior boom" of aging baby boomers. He admonished Congress, "Long-term care will become a bigger and bigger challenge with the aging of America-and we must do more to help our families deal with it."[11] More than six years later, the long-term care problem has only grown worse. Congress has a duty to address this problem before it is too late.

 

Kirk A. Johnson, Ph.D., is a Senior Policy Analyst in the Center for Data Analysis at The Heritage Foundation.



[1] U.S. Census Bureau, "U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin," Table 2a, 2004, at http://www.census.gov/ipc/www/usinterimproj.

[2] Ibid.

[3] Robert A. Levy, William Riley, Mary Gabay, John Nyman, and Roger Feldman, "Analysis of the Use of Annuities to Shelter Assets in State Medicaid Programs," CNA Corporation Report IPR 11277, January 2005, p. 1, at /static/reportimages/3DCB6C6567E8CE5C67BF73B70F0B9ACE.pdf.

[4] U.S. Census Bureau, "Group Quarters Population by Sex by Age by Group Quarters Type," Census 2000, Table P38, at http://factfinder.census.gov.

[5] Centers for Medicare and Medicaid Services, "National Health Care by Type of Expenditure: Calendar Year 2001," November 2003, at http://www.cms.hhs.gov/researchers/pubs/
datacompendium/2003/03pg12.pdf
. It should be noted that Medicare pays for another 11.7 percent of nursing home care, which means that the government covers nearly 60 percent of all nursing home expenditures.

[6] Health Care Financing Administration, A Profile of Medicaid: Chartbook 2000, p. 63, at /static/reportimages/EA35540F62CE768A3932D0C85A985D92.pdf.

[7] Centers for Medicare and Medicaid Services, "National Health Care by Type of Expenditure: Calendar Year 2001," November 2003, at http://www.cms.hhs.gov/researchers/pubs/
datacompendium/2003/03pg12.pdf
.

[8] See Jacob Siegel, "Aging into the 21st Century: Projected Health Conditions Among the Elderly," U.S. Department of Health and Human Services, Administration on Aging, National Aging Information Center, May 31, 1996, at http://www.aoa.dhhs.gov/prof/Statistics/
future_growth/aging21/aging_21.asp
.

[9] Levy, Riley, Gabay, Nyman, and Feldman, "Analysis of the Use of Annuities to Shelter Assets in State Medicaid Programs," pp. 6-10.

[10] Jordan Pfuntner and Elizabeth Dietz, "Long-Term Care Insurance Gains Prominence," Bureau of Labor Statistics, January 28, 2004, at http://www.bls.gov/opub/cwc/cm20040123ar01p1.htm.

[11] CNN, "Transcript: Clinton's State of the Union speech," January 19, 1999, at http://www.cnn.com/ALLPOLITICS/stories/
1999/01/19/sotu.transcript
.

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