Wednesday February 23, 2000
(This "Bullet," the third in our LTC Reality Check series, is relatively long. You may wish to save it for review later and future reference.)
Through "LTC Bullets" (especially those in our "LTC Reality Check" series), the Center for Long-Term Care Financing tries to provide and explain accurate, well-documented, thoroughly-contextualized information about long-term care financing.
We think this service is very important because so much material published by the media is unreliable, misleading or just plain wrong--even when it comes from presumably reliable sources like the government. One of our pet peeves at the Center is the commonly published refrain that (1) Medicare pays very little for nursing home care, (2) that Medicaid accounts for ONLY half the cost of nursing homes, (3) that out-of-pocket nursing home expenditures are destroying the life savings of huge numbers of older Americans, and (4) that private long-term care insurance pays for around five percent of nursing home care in the United States.
Not one of these statements is unqualifiedly true. Yet, such "facts" are strewn carelessly throughout almost everything we read on this subject. Let's nail down the real truth once and for all.
A good source of hard data on nursing home expenditures is the Health Care Financing Administration's web site at www.hcfa.gov/ Click on the tab "Stats & Data." Then go to "National Health Expenditures - Selected Years: 1960-1998" and pick "1998 National Health Expenditures, Tables." Choose "Table 7: Nursing Home Care Expenditures Aggregate and Per Capita Amounts and Percent Distribution, by Source of Funds: Selected Calendar Years 1960-98."
What you will find is a list by year starting in 1960 and going through 1998 of total nursing home expenditures broken down by source of funds. For example:
Total nursing home expenditures for 1998 were $87.8 billion, up 72.5% from $50.9 billion in 1990. Medicaid's share of these expenditures was 46.3%, little changed from 45.4% in 1990. Medicare's share was 11.9%, up steeply from 3.4% eight years earlier. Out-of-pocket costs, on the other hand, were 32.5% in 1998, down precipitously from 43.1% in 1990. The last major source of nursing home expenditures reported by HCFA in this table is "private health insurance" which the agency reports was 5.3 % in 1998, only slightly higher than 4.1% in 1990.
What does this hard data tell us about the alleged facts cited above?
First: Medicare may not pay much for "long-term care," but it paid plenty for short-term skilled nursing home care: $10.4 billion in 1998, over six times what Medicare contributed in 1990. Maybe the public is not so stupid after all when they tell survey researchers they think Medicare pays for nursing home care. Every time Aunt Harriet gets a hip replacement or Uncle Murray requires some rehab, families learn that Medicare does indeed pay for nursing home care. Most people don't distinguish between this publicly financed skilled care and the possible future need for custodial long-term care for which Medicare does not pay. Consequently, the public's denial of the LTC risk is hardened and their perception of the need for private insurance is reduced.
Second: Medicaid does pay about half the cost of nursing home care (46.3% in 1998 vs. 45.4% in 1990), but this is only part of the story and the less important part at that. Medicaid recipients must contribute most of their income toward the cost of their care. Therefore, Medicaid often pays only a small proportion of the total cost of the care, while the recipient pays the rest from Social Security and other private income. This fact is critical, because, if Medicaid pays even one dollar of the cost of care, the nursing home receives Medicaid's notoriously low reimbursement rate, which is on average only 80% of the going private-pay rate. Consequently, although Medicaid pays less than half the cost of nursing homes nationally, it drags down reimbursement (and hence quality of care) for over two-thirds of all nursing home patients (those for whom Medicaid pays any amount) and four-fifths of all patient days (Medicaid patients tend to be the longest stayers and by far the most expensive patients.) Therefore, the deleterious effect of Medicaid on access to and quality of long-term care is vastly underestimated by the "fact" that it pays only half the cost of nursing home care.
Third: the oft-repeated "fact" that catastrophic nursing home costs are wiping out the life savings of a wide swath of middle-class, older Americans does not comport with the data. Medicaid and Medicare alone paid for 58.2% of all nursing home costs in 1998. So-called "out-of-pocket" (OOPs) costs accounted for 32.5% of the total, but these OOPs are not drawn mostly from savings, but rather from Social Security and private pension income plus the proceeds from investments and interest on savings. A HCFA study several years ago estimated that fully 41% of out-of-pocket nursing home costs came from Social Security income--a spend-through of benefits from another government program, not a spend-down of assets. HCFA reports that "private health insurance" paid 5.3% of nursing home costs in 1998. Most people think this refers to private LTC insurance, but it does not. It refers instead to "Blue Cross/Blue Shield, group hospital plans, etc." according to HCFA staff. Finally, HCFA has no way of knowing how much money private long-term care insurance contributes toward the cost of nursing home care. This is true because private insurance pays the beneficiary; the beneficiary pays the nursing home; and the data gets reported as an "out-of-pocket" cost when it is really just another third-party payment. There is no way to say exactly, but we estimate that 85% to 90% of the entire cost of nursing home care in the United States comes either directly from Medicaid or Medicare, indirectly from Social Security and private insurance, or from private patient income rather than assets. This estimate comports with the findings of three dozen empirical "spend-down" studies conducted in the late '80s and early '90s that showed asset spend-down to be far less than previously believed.
Fourth: as explained in the previous paragraph, the 5.3% of nursing home costs frequently attributed to private long-term care insurance based on the figure reported by HCFA in its web site table, is not private long-term care insurance at all. Instead, it is major medical, Medicare supplemental insurance, group hospital plans and other forms of insurance that pay nursing homes directly. No one knows how much private LTC insurance contributes to the cost of long-term care, because whatever that amount is, it is subsumed under the category of "out-of-pocket" costs. Thus, private long-term care insurance is not only denied any credit for its contribution to nursing home expenditures, but its contribution is also lost within the inflated category of OOPs which makes the apparent private cost of nursing home care appear much more substantial than it really is.
Getting facts like these correct is very important. Many of the bad public policy decisions that well-intentioned officials make are based on misunderstandings such as those corrected in this Bullet. Once we realize that catastrophic spend-down is not nearly as significant as previously thought, that Medicare and Medicaid are coopting a much larger proportion of the LTC financing marketplace than is generally realized, and that private long-term care insurance is therefore severely disadvantaged in its ability to attract buyers, sensible public policy solutions become much easier to conceive. We must target scarce public resources to the needy, assure that others pay for their own care, and create incentives for everyone young, healthy and prosperous to plan early, save diligently and insure fully for the risk of long-term care.
The issues and problems discussed in this Bullet and their solutions are described in much more detail within the Center for Long-Term Care Financing's white paper "The Myth of Unaffordability: How Most Americans Should, Could and Would Buy Private Long-Term Care Insurance."
Order a copy of "The Myth of Unaffordability" paper ($34.95; free to media and lawmakers) by contacting us toll free at 1-877-557-3627 or email firstname.lastname@example.org.