State Cost Containment Initiatives for Long-Term Care Services for Older People

Order Code RL30752
CRS Report for Congress
Received through the CRS Web
State Cost Containment Initiatives for
Long-Term Care Services for Older People
May 8, 2000
Joshua M. Wiener, Consultant
Domestic Social Policy Division
with David G. Stevenson and Jessica Kasten
Congressional Research Service ˜ The Library of Congress

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State Cost Containment Initiatives for
Long-Term Care Services for Older People
Summary
Although the rate of growth for Medicaid long-term care expenditures for the
elderly has slowed in recent years, spending on these services still represents a
substantial proportion of total Medicaid expenditures. The aging of the population
guarantees greater future need for long-term care. Consequently, state policymakers
have sought to reduce the rate of growth in these expenditures through a variety of
strategies.
One approach is for states to create more effective and efficient financing and
delivery systems by developing home and community-based services and by
integrating acute and long-term care services through the use of managed care.
Although some of the recent emphasis on community-based care is surely based on
consumer preference, a major impetus for this reform is the promise of cost-savings
– an outcome about which research has been equivocal. Two relatively new areas of
policy development involve consumer-directed home care and nonmedical residential
facilities.
Almost all states are looking to managed care and the integration of acute and
long-term care services as a potential way to reduce the rate of increase in
expenditures. Progress on these initiatives has been slow, in part because Medicaid
and, often, Medicare, waivers are needed for their implementation. Also, the mixed
experience with Medicaid and Medicare managed care for a less complicated
population has resulted in a relatively cautious approach to integrated managed care
programs for the frail older population.
A second strategy to reduce state expenditures is to substitute private, Medicaid,
and Medicare financing for state funding. States have sought to promote private
long-term care insurance as a way to reduce Medicaid long-term care expenditures
by enacting tax incentives, offering private long-term care insurance to state
employees, and establishing public/private partnerships. These initiatives have not
increased the number of people with private long-term care insurance significantly.
Although almost all states believe that “Medicaid estate planning” is a problem, it is
a major concern in only a few states. While increasing federal contributions through
Medicare and Medicaid maximization are being used effectively by some states, these
strategies simply shift costs to the federal government.
In the short run, if faced with an economic downturn, states are likely to rely on
more traditional strategies to reduce spending, such as cutting reimbursement rates
and controlling nursing home supply. Many states are using certificate of need
restrictions or moratoria on new nursing home construction to limit the supply of
services, and, therefore, utilization. With the repeal of the Boren amendment in the
Balanced Budget Act of 1997, states have much greater legal freedom to impose rate
cuts on nursing homes. However, so far, relatively few states have done so, reflecting
good economic times and the political power of the nursing home industry.

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Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Strategies to Control Long-Term Care Expenditures . . . . . . . . . . . . . . . . . . . . . 9
System Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Expand Home and Community-Based Services . . . . . . . . . . . . . . . . . . 9
Integrate Acute and Long-Term Care Services through
Managed Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Increase Private and Federal Resources . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Encourage Private Long-Term Care Insurance . . . . . . . . . . . . . . . . . 18
Reduce “Medicaid Estate Planning” . . . . . . . . . . . . . . . . . . . . . . . . . 20
Maximize Federal Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Traditional Strategies To Control Spending . . . . . . . . . . . . . . . . . . . . . . . 22
Cut Reimbursement Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Limit the Supply of Long-Term Care Service Providers . . . . . . . . . . 25
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
List of Figures
Figure 1. Medicaid Expenditures for Elderly Beneficiaries by Type of
Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. Demographic Characteristics and Potential Demand for
Long-Term Care Services across the ANF States, 1997 . . . . . . . . . . . . . . . 4
Table 2. Characteristics of the Long-Term Care System Among
ANF States, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 3. Medicaid Long-Term Care Expenditures by State, 1997 . . . . . . . . . . . . 6
Table 4. Medicaid Long-Term Care Expenditures by Type of Service,
1990-1997, Elderly Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 5. Average Medicaid Rates for Nursing Facility Reimbursement
by ANF State, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Table 6. Certificate of Need (CoN) and Moratoria in the ANF States,
By Provider Type, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
This paper was prepared under contract with the Congressional Research Service
(CRS) for two CRS-sponsored seminars on Long-Term Care: Challenges for the 21st
Century held May 9 and 11, 2000. Partial funding for the paper and the seminars was
provided by The Robert Wood Johnson Foundation. For further information contact
Carol O’Shaughnessy.

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State Cost Containment Initiatives for
Long-Term Care Services for Older People
Long-term care services for older adults represent a substantial share of total
health care spending in the United States and an area of major concern for state
policymakers. Nursing home and home health care for people of all ages accounted
for almost 12% of personal health expenditures in 1998, and they were approximately
20% of all state and local health care spending.1 Importantly, neither private health
insurance nor Medicare cover long-term care services to any significant extent, and
few older adults currently have private long-term care insurance. The disabled elderly
must rely on their own resources or, when these are depleted, turn to Medicaid or a
few state-funded programs to pay for their long-term care. In 1997, 68% of nursing
home residents were dependent on Medicaid to finance their care.2 Medicaid long-
term care expenditures are projected to increase by 74%-103% in inflation-adjusted
dollars between 2000 and 2020.3
Because of the high cost of long-term care (a year in a nursing home is estimated
to cost an average of $56,000 in 1998), Medicaid coverage for long-term care
provides a safety net for the middle class as well as the poor.4 Approximately one-
third of discharged nursing home residents pay privately when admitted and eventually
spend down their resources to establish eligibility for Medicaid.5
This paper reviews state policies on long-term care for the older population,
emphasizing efforts to control the rate of increase in Medicaid expenditures for these
services. Data for this paper draw heavily from the 13 states – Massachusetts, New
York, New Jersey, Florida, Alabama, Mississippi, Texas, California, Colorado,
Washington, Wisconsin, Minnesota, and Michigan – that have been intensively studied
1 Health Care Financing Administration. Office of the Actuary. National Health Statistics
Group. Personal Health Care Expenditures, by Type of Expenditure and Source of Funds:
Selected Calendar Years 1998-98. [http://www.hcfa.gov/stats/nhe-oact/tables/t9.htm],
accessed May 3, 2000.
2 American Health Care Association. Facts and Trends: The Nursing Facility Sourcebook,
1999. American Health Care Association, Washington, DC, 1999.
3 U.S. Congressional Budget Office. Projections of Expenditures for Long-Term Care
Services for the Elderly, CBO Memorandum, Washington, March 1999.
4 Unpublished estimates of nursing home revenue per day, Office of National Health Statistics,
Office of the Actuary, Health Care Financing Administration, 2000.
5 Wiener, J.M., C.M. Sullivan, and J. Skaggs. Spending Down to Medicaid: New Data on
the Role of Medicaid in Paying for Nursing Home Care. Washington, American Association
of Retired Persons, June 1996.

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CRS-2
as part of The Urban Institute’s Assessing the New Federalism (ANF) project.6 These
13 states account for a majority of total Medicaid spending for long-term care for
older people.
Like the rest of the Medicaid program, states have considerable flexibility in the
provision of long-term care services and efforts at reform differ across the states.
Furthermore, the strategies used by states to control long-term care expenditures are
much more varied than for acute care, where there is a single-minded focus on
increasing managed care enrollment.
Background
Table 1 contains demographic characteristics of the United States and the ANF
states and their Medicaid programs. While nearly 13% of the U.S. population was
over the age 65 in 1997, this proportion ranges across ANF states from a low of
10.1% in Colorado to 18.4% in Florida. Similarly, the proportion of Medicaid
beneficiaries who are elderly varies by state, from a low of 7% in Washington to a
high of 13.5% in Alabama. Nationally, older Medicaid beneficiaries accounted for
just over 10% of enrollees.
Table 2 details some of the characteristics of the long-term care systems in the
ANF states in 1998, including licensed nursing facilities, nonmedical residential care
facilities, and home health agencies. These market characteristics vary widely across
the states by service provider. The number of nursing home beds per 1000 elderly age
75 and above among the ANF states ranged from 63.3 in Florida to 150.7 in
Minnesota (the U.S. average is 113.2). Mississippi had the fewest licensed,
nonmedical residential care beds, such as board and care homes and assisted living
facilities, per capita (22.6 beds per 1,000 elderly aged 75 and over), while Washington
had the most (102.2 beds per 1,000 elderly aged 75 and over). Finally, the number
of home health agencies per capita in 1998 ranged from a low of 0.15 per 1,000
elderly aged 75 and over in New Jersey to a high of 4.08 per 1,000 elderly aged 75
and over in Texas, compared to 1.40 nationally.
Almost $60 billion was spent on long-term care for people of all ages by the
Medicaid program in 1997, 41% of total Medicaid expenditures for services
(excluding disproportionate share hospital payments).7 Long-term care spending on
older beneficiaries accounted for the majority ($32.2 billion) of this spending, 22% of
6 Funding for the long-term care component of the Assessing the New Federalism project was
provided by The Commonwealth Fund. Financial support for the Assessing the New
Federalism project was provided by the Annie E. Casey Foundation, the Henry J. Kaiser
Family Foundation, the W. K. Kellogg Foundation, the John D. and Catherine T. MacArthur
Foundation, the Fund for New Jersey, the McKnight Foundation, and the Robert Wood
Johnson Foundation. Additional support for the Assessing the New Federalism project is
provided by the Joyce Foundation and the Lynde and Harry Bradley Foundation through
grants to the University of Wisconsin at Madison.
7 Urban Institute calculations based on HCFA 64 data and DSH.

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total Medicaid spending. As shown in Figure 1, nearly three-fourths of Medicaid
expenditures for older people were for long-term care services. Eighty-six percent
of these long-term care expenditures were for institutional care or mental health
services, while nearly 14% were for home care services. Medicaid long-term care
spending for older people is more institutionally-based than it is for younger people
with disabilities.
Table 3 shows Medicaid long-term care spending on the elderly for the ANF
states and the United States, spending on these services as a percent of total Medicaid
spending, spending per elderly enrollee and resident, and the proportion of
expenditures by type of service. In 1997, while long-term care expenditures for the
elderly were approximately 22% of all Medicaid spending in the United States, this
proportion ranged from 12.5% in California to 31.2% in Minnesota among the ANF
states. Per elderly resident Medicaid spending for long-term care varies from a low
of $372 in Florida to a high of $2,455 in New York, while the national average was
$943. The share of long-term care expenditures spent on home care varied from
0.3% in Mississippi to 28% in Texas, with a national proportion of 11.7%. Some
states, such as California, Florida, Massachusetts, and Wisconsin, have significant
state-funded long-term care programs which do not appear in these data.
Table 4 presents trend data for Medicaid long-term care expenditures for the
elderly between 1990 and 1997. Medicaid long-term care spending for the elderly
increased an average of 8.3% annually from 1990-1997 (compared to 10.9% for total
Medicaid expenditures over the same time period) and grew more slowly in later
years. Although it has been a change from historical patterns, in later years, rates of
growth for home care have been higher than rates of growth for institutional care.
From 1995 to 1997, annual rates of growth for home care were 9.2% compared to
3.5% for nursing home care.

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Table 1. Demographic Characteristics and Potential Demand for Long-
Term Care Services across the ANF States, 1997
Elderly
Total elderly
Elderly as %
Medicaid
Elderly beneficiaries
population
of total
beneficiaries
as % of total
(000)a
populationa
(000)b
beneficiariesb
United States
34,185
12.8%
4,114
10.1%
Alabama
565
13.1
85
13.5
California
3,568
11.1
562
8.8
Colorado
394
10.1
41
11.7
Florida
2,705
18.4
202
9.7
Massachusetts
861
14.1
96
11.8
Michigan
1,218
12.5
98
7.2
Minnesota
581
12.4
62
10.5
Mississippi
336
12.3
66
12.2
New Jersey
1,102
13.7
105
12.2
New York
2,421
13.3
373
11.5
Texas
1,969
10.2
332
11.8
Washington
647
11.5
64
7.0
Wisconsin
690
13.3
67
11.6
a U.S. Department of Commerce, Bureau of the Census, State Population Estimates, 1997. Elderly defined as
age 65+.
b Urban Institute calculations based on HCFA 64 data.

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Table 2. Characteristics of the Long-Term Care System Among ANF States, 1998
Licensed nursing facilities
Licensed residential care
Licensed home health carea
Beds/1000
Total
Beds/1000
Total
Agencies/1000
Total facilities
Total beds
75 +b
facilities
Total beds
75 +b
agencies
75 +b
Alabama
231
25,713
101.0
282
7,014
27.6
180a
0.71
California
1,456
131,941
79.0
10,652
169,184
101.3
1101
0.66
Colorado
234
20,720
114.9
456
10,880
60.3
163a
0.90
Florida
698
81,172
63.3
2,421
67,684
52.8
1,273
0.99
Massachusetts
516
54,881
129.8
258
10,189
24.1
217a
0.51
Michigan
457
51,886
91.7
4,673
46,191
81.6
251a
0.44
Minnesota
435
43,782
150.7
3,307
17,400
59.9
767
2.64
Mississippi
180
17,501
114.9
165
3,441
22.6
69
0.45
New Jersey
355
49,871
96.0
443
19,210
37.0
80
0.15
New York
673
118,885
104.7
1,332
41,328
36.4
963
0.85
Texas
1,331
131,172
148.2
1042
29,844
33.7
3,613
4.08
Washington
285
27,204
86.7
2,676
32,080
102.2
159
0.51
Wisconsin
429
48,135
142.6
1,922
23,853
70.7
192
0.57
United States
17,458
1,810,000
113.2
51,227
878,804
54.9
23,263
1.40
Source: B. Bedney et al. 1998 State Data Book on Long-Term Care Program and Market Characteristics. The University of California San
Francisco, November 1999.
a Certified Home Health Agencies.
b U.S. Department of Commerce, Bureau of the Census. State Population Estimates, 1998.

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Table 3. Medicaid Long-Term Care Expenditures by State, 1997
Elderly Beneficiaries, by Type of Service
Proportion of LTC expenditures, by type of service
Total Long-
Per elderly Per elderly
term care LTC as percent beneficiary
resident
Nursing
Mental
Home
(000s) of total Medicaid
spending
spendinga
facilityb
ICF-MRc
health
care
United States
$32,239,612
22.2%
$7,838
$943
83.9%
1.7%
2.7%
11.7%
Alabama
447,124
25.1
5,237
791
92.0
0.2
3.5
4.3
California
1,929,001
12.5
3,435
541
76.5
0.7
11.7
11.1
Colorado
334,451
24.4
8,090
848
83.1
3.8
0.5
12.6
Florida
1,006,501
16.5
4,974
372
95.0
0.4
1.2
3.5
Massachusetts
1,173,272
25.2
12,240
1,362
93.1
1.7
0.9
4.3
Michigan
988,211
18.8
10,071
811
94.6
1.8
2.7
0.9
Minnesota
839,536
31.2
13,524
1,445
91.5
1.3
0.9
6.3
Mississippi
265,914
17.9
4,020
792
98.3
1.5
0.0
0.3
New Jersey
1,067,944
24.0
10,171
969
84.4
2.5
1.6
11.6
New York
5,944,054
27.4
15,950
2,455
71.8
2.9
3.7
21.6
Texas
1,718,106
21.2
5,175
873
69.5
2.5
0.1
28.0
Washington
498,519
17.6
7,828
771
89.2
1.8
0.2
8.8
Wisconsin
739,114
28.9
11,039
1,072
88.5
2.4
0.5
8.6
Source: Urban Institute calculations based on HCFA 64 data. Prepared for the Kaiser Commission on the Future of Medicaid. Does not include
Disproportionate Share Hospital payments, administrative costs, accounting adjustments, or the US Territories. Totals may not add due to
rounding.
a U.S. Department of Commerce, Bureau of the Census. State Population Estimates, 1997. Elderly defined as age 65+.
b Nursing Facility refers to skilled nursing facilities/other intermediate care facilities.
c “ICF/MR” refers to intermediate care facilities for the mentally retarded.

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Table 4. Medicaid Long-Term Care Expenditures by Type of Service, 1990-1997
Elderly Beneficiaries
LTC expenditures ($ in millions)
Average annual growth
1990
1991
1992
1993
1994
1995
1996
1997
1990-97 1990-93 1993-95 1995-97
Total
18,442 21,162 25,640 26,251 28,466 30,172 30,616 32,240
8.3% 12.5%
2.0%
3.4%
SNF/ICF-
Othera
15,107 17,279 20,485 21,860 23,687 25,221 25,608 27,043
8.7
13.1
7.4
3.5
ICF-MRb
313
334
393
468
489
570
569
549
8.3
14.3
10.4
-1.9
Mental
Health
1,042
1,253
2,160
1,145
1,137
1,221
1,267
882
-2.4
3.2
3.3
-15.0
Home Care
1,980
2,296
2,602
2,778
3,153
3,160
3,172
3,766
9.6
11.9
6.7
9.2
Source: Urban Institute calculations based on HCFA 2082 and HCFA 64 data.
Does not include Disproportionate Share Hospital payments, administrative costs, accounting adjustments, or the US Territories.
Totals may not add due to rounding.
a SNF/ICF refers to skilled nursing facilities/other intermediate care facilities.
b “ICF/MR” refers to intermediate care facilities for the mentally retarded.

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Figure 1: Medicaid Expenditures for Elderly Beneficiaries by Type of Service, 1997
O t h e r A c u t e
3%
HMOs
2%
M e d i c a r e
6%
Drugs
6%
Phys/Lab-Xray
2%
I n p a t i e n t
5%
O u t p a t i e n t
2%
Nursing Facilities
H o m e H e a l t h
61%
10%
M e n t a l H e a l t h
2%
ICF-MR
1%
Long-Term Care = 74.1%
Acute Care = 25.9%
Total Expenditures = $44.5 billion
Source: Urban Institute calculations based on HCFA 2082 and HCFA 64 data
Does not include Disproportionate Share Hospital payments, administrative costs, accounting adjustments, or the US Territories.
Totals may not add due to rounding. “Other Acute” care services include case management, family planning, dental, EPSDT, vision, other
practitioners’ care, etc. “ICF/MR” refers to intermediate care facilities for the mentally retarded. “Nursing Facility” refers to skilled nursing
facilities/other intermediate care facilities.

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Strategies to Control Long-Term Care Expenditures
If states are to control Medicaid expenditures, they will have to address long-
term care for the elderly. Overall, there are three broad strategies that states use to
control state spending: (1) reform the delivery system so that care can be provided
more efficiently; (2) bring more outside resources (e.g., private resources, Medicaid,
and Medicare) into the long-term care system to offset state expenditures; and (3)
reduce Medicaid eligibility, reimbursement, and services. Like many of the
characteristics discussed above, states diverge in the extent to which they focus on
each of these strategies and how far each state has progressed in implementing long-
term care reform.
System Reform
An important general strategy for saving money is to reorganize the health care
delivery system in ways that make care more efficient and effective. Such a
reorganization can be accomplished through expanding home care and nonmedical,
residential long-term care services and by extending managed care to include long-
term care as well as acute care services.
Expand Home and Community-Based Services. The most widespread reform
to the public long-term care system has been the effort to shift the delivery system
towards home and community-based care and away from institutional care.
Policymakers in almost every state endorse creating a more balanced delivery system
as a goal. However, Medicaid long-term care expenditures for the elderly are still
overwhelmingly for nursing home care. Noninstitutional services spending has
increased in recent years, although expenditures are still small. In 1997, 14% of
Medicaid long-term care expenditures for older people were for home and
community-based services, up from 10% in 1995.8 Although total Medicaid home
and community-based service spending has increased rapidly in recent years, the vast
majority of these expenditures are for younger persons with disabilities, especially
those with mental retardation or developmental disabilities.
Pushing states in the direction of home and community-based services is the U.S.
Supreme Court’s Olmstead v. L.C. decision in 1999, which found that the Americans
with Disabilities Act (ADA) meant that unnecessary institutionalization is illegal
discrimination, and required the option of home and community-based services be
provided. This right is not unlimited and may be bounded by state fiscal limits.
Although the reasoning of the decision would appear to apply to all persons with
disabilities, the exact implications for older people are not clear since the case was
brought by two Georgia women with mental retardation and mental illness. In a letter
to state Medicaid directors in January 2000, the Health Care Financing Administration
(HCFA) asks states to develop plans to comply with the Olmstead decision.9
8 Ibid.
9 Letter to State Medicaid Directors from Timothy M. Westmoreland, Director, Center for
(continued...)

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Medicaid home care spending is very uneven. California, Massachusetts, New
York, and Texas alone accounted for 54% of total Medicaid home care expenditures
for the elderly in 1997 (elderly beneficiaries in these four states were 33% of all
elderly Medicaid beneficiaries). Spending for all home and community-based services
for the elderly in New York was far greater than any other state, and accounted for
34% of national Medicaid home care expenditures for the elderly in 1997 even though
elderly beneficiaries in New York were just 9% of all elderly Medicaid beneficiaries.
As discussed above, several states also have sizable state-funded programs that
provide home and community-based care. For going federal Medicaid matching funds
allows states maximum flexibility in determining eligibility, providing services, and
budgeting expenditures. However, most states are increasingly choosing to finance
their home and community-based services through the Medicaid program.
Medicaid Funding Strategies. States can fund Medicaid home and community-
based services either through the regular Medicaid program with coverage of home
health (which is a mandatory benefit) and personal care (which is an optional benefit)
or through home and community-based services (HCBS) waivers (Section 1915(c)
of the Social Security Act). Although all states have Medicaid home and community-
based service waivers for older people, these programs are not always a large part of
the home care available in the state. For example, California, Massachusetts, New
York and Texas have focused much of their expansion of home and community-based
services through coverage of personal care and home health within the regular
Medicaid program. If states choose this approach, then services must be offered as
an open-ended entitlement, with services available on a statewide basis and coverage
not limited to specific eligibility groups (e.g., just the elderly or younger people with
physical disabilities).
Because of a fear of runaway spending resulting from the large number of people
in the community who are not currently receiving home and community-based
services, states are increasingly choosing to expand their commitment to this type of
care through the more tightly controlled Medicaid waivers. Under this option, states
can cover a wide range of nonmedical long-term care services, including case
management, personal care services, home modification, transportation, adult day
care, habilitation, rehabilitation, and respite care. States must target people at high
risk of institutionalization and assure HCFA that the average cost of providing
services with the waiver will not exceed the average cost without the waiver.
Because of this cost-effectiveness requirement, states may provide these services only
to a pre-approved number of people, limiting the potential financial liability that would
accompany an open-ended entitlement benefit. Under the waiver provisions, services
do not have to be offered statewide and can be limited to highly-targeted groups of
Medicaid eligibles. After a relatively slow start in the early 1980s, total home and
9 (...continued)
Medicaid and State Operations, Health Care Financing Administration, and Thomas Perez,
Director, Office of Civil Rights, U.S. Department of Health and Human Services, January 14,
2000.

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community-based waiver expenditures (for the elderly and young people with
disabilities) had increased from $0.7 billion in 1988 to almost $8 billion in 1997.10
Although conflict between the federal government and the states over approval
of waivers was substantial and bitter during the Reagan and Bush Administrations,
regulatory changes implemented by the Clinton Administration have made obtaining
waivers routine. Indeed, some states are not using all of the “slots” approved by
HCFA, primarily because state matching funds are not available. Most ANF states
uniformly described their relationship with HCFA regarding the waivers as good and
reported that the HCFA regional offices were helpful and responsive. However,
states complain about the paperwork and staff time involved in obtaining waivers, and
some note that the monitoring by HCFA was primarily a paper review which does not
focus on client outcomes.
Given the greater ease with which states can secure approval from HCFA, the
importance of HCBS waivers for the older population is likely to increase. For
example, Michigan expanded its HCBS waiver from 4,100 slots in 1998 to 15,000
slots projected for 2000. And Mississippi is looking to expand its HCBS elderly and
disabled waiver from 3,200 slots in FY2000 to 10,000 slots over the next 3 years.11
Cost Containment Strategies. In almost every state, home and community-
based services are “sold” primarily on their ability to achieve cost savings, although
meeting the needs of people in the community and providing consumers with the
services they want is also important. While states hope to save money by substituting
lower cost home and community-based services for more expensive nursing home
care, most research suggests that expanding home care is more likely to increase
rather than decrease total long-term care costs.12 The primary reason for this result
is what many call the “woodwork effect.” While many older persons would for go
paid long-term care services if given only the option of nursing home care, many of
these same individuals would use home care services if given the choice. Thus, the
costs associated with large increases in home care use could more than offset the
relatively small reductions in nursing home use. Budget neutrality or cost savings will
be especially difficult to obtain if the cost per person of serving people in the
community is high.
Despite this traditional view among researchers, some recent research is more
encouraging about the potential cost-effectiveness of home and community-based
care. For instance, a 1996 study of Washington, Oregon, and Colorado by Alecxih
et. al. concluded that home and community-based services were cost-effective
10 Harrington, C., H. Carillo, V. Wellin, F. Norwood, and N. Miller. 1915(c) Medicaid Home
and Community-Based Waiver Participants, Services, and Expenditures, 1992-1997. San
Francisco, University of California, March 2000.
11 Mississippi Medicaid, HCBS Waiver Programs: Elderly and Disabled Waiver,
[http://www.dom.state.ms.us/ltc1/body_ltc2.htm], accessed April 14, 2000.
12 Wiener, J.M., and R. J. Hanley. Caring for the Disabled Elderly: There’s No Place Like
Home, in S. M. Shortell and U. E. Reinhardt, Improving Health Policy and Management:
Nine Critical Research Issues for the 1990s Ann Arbor, Health Administration Press, 1992.
p. 75-110.

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alternatives to institutional care in these states.13 A 1994 study by the U.S. General
Accounting Office came to similar conclusions about home and community-based
services in Washington, Oregon, and Wisconsin.14 Moreover, some states argue that
their Medicaid waiver costs are so low that they are achieving cost neutrality, if not
cost savings, even while serving additional people who would not otherwise be
institutionalized. For example, New York claims that its home and community-based
services clients cost only half as much as nursing homes residents.15 Similarly,
Alabama claims its waiver beneficiaries cost $17,000 less than nursing home clients.16
On the other hand, states may be serving a significantly less disabled population than
in nursing homes and persons who might not otherwise be institutionalized.
Further, the federal government has encouraged states to identify and remedy
barriers to community-based care and assist nursing home residents relocate to the
community through its “Date Certain” and “Nursing Home Transition” grants
programs. Colorado, Michigan, New York, Texas, Wisconsin, New Hampshire, New
Jersey, and Vermont received such grants from HCFA in 1998 and 1999.17
States have addressed the issue of cost-effectiveness of home and community-
based services in a variety of ways. First, states set a maximum amount (generally the
average Medicaid expenditure for nursing home care) that they will spend on home
and community-based services for a single individual. According to some researchers,
expenditures at this level are probably too high to achieve budget savings because of
the difficulty of targeting services only to people who would be institutionalized
without them.18 Some states, however, are spending much less. The average per-
recipient cost of in-home and alternative care facilities in Colorado, a state identified
by Alecxih et. al. as having a cost-effective system of care, is 16% and 14%,
respectively, of the average per-recipient Medicaid expenditure for nursing home
care.19
13 Alecxih, L. M. B., S. Lutzky, and J. Corea. Estimated Savings from the Use of Home and
Community-Based Alternatives to Nursing Facility Care in Three States. Washington,
American Association of Retired Persons, 1996.
14 U.S. General Accounting Office. Medicaid and Long-Term Care: Successful Efforts to
Expand Home Services While Limiting Costs. Washington, 1994.
15 Raetzman, Susan and Susan Joseph. Long-Term Care in New York: Innovations in for
Care Elderly and Disabled People. Issue brief, New York, The Commonwealth Fund, 1999.
1 6 A l a b a m a M e d i c a i d A g e n c y , 1 9 9 8 A n n u a l R e p o r t ,
[http://www.Medicaid.state.al.us/about/98anrep/longterm.htm], accessed April 24, 2000.
17 Letter to State Medicaid Directors from Timothy M. Westmoreland, Director, Center for
Medicaid and State Operations, Health Care Financing Administration, January 11, 2000.
[http://www.hcfa.gov/medicaid/smd11100.htm]
18 Weissert, W.G. One More Battle Lost to Friendly Fire – Or If You Spend Too Much It’s
Hard to Save Money. Medical Care, v. 31, no. 9, suppl: SS119-SS121.
19 Alecxih, L. M. B, S. Lutzky, J. Corea, B. Coleman. Estimated Cost Savings From the Use
of Home and Community-Based Alternatives to Nursing Facility Care in Three States,
Washington, American Association of Retired Persons, 1996.

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Second, states are providing services to a more disabled population who have
a higher risk of institutionalization than they did 10 years ago, increasing the
probability of substitution of home care for nursing home care. However, given the
requirement that home and community-based waiver services be targeted to persons
who would be institutionalized without them, surprisingly few states impose eligibility
requirements for waiver services beyond meeting the nursing home level of disability,
even though many severely disabled people live in the community and would not enter
a nursing home even if home and community-based services were not provided.
Third, states are experimenting with consumer-directed home care programs,
which give beneficiaries, rather than home care agencies, the power to hire, train,
supervise and fire the worker.20 Relatively common for services among younger
people with physical disabilities, these initiatives are just starting for older persons in
many states, although there are well-established programs in California, Colorado,
Kansas, Maine, Michigan, Oregon, Washington, and Wisconsin. Consumer-directed
care is often less expensive than agency-directed care because independent workers
receive less supervision and fringe benefits and sometimes lower wages than agency-
directed employees. Stakeholders report that beneficiaries of all ages can manage
their services and appear to derive significant benefits from doing so.21
Fourth, recognizing that there are certain economies of scale in residential
settings that are lacking in traditional home care where services are provided to one
person at a time, many states are exploring the potential role of residential alternatives
to nursing home care, including adult foster care and assisted living facilities.
Medicaid home and community-based services waivers can cover the “service”
component of these nonmedical residential facilities, but not the room and board
components. In 1998, 35 states covered or planned to cover the service component
of assisted living facilities or other congregate care through Medicaid for frail older
persons.22 The states hope to provide services that are more home-like, provide
greater personal autonomy, and cost less than nursing homes. In general, the nursing
home industry contends that its residents are too disabled to be served adequately in
these alternate settings, although in some states, such as Wisconsin and Michigan, the
nursing home industry is expanding into nonmedical residential facilities.
As states consider expanding these residential alternatives, they face a number
of very difficult issues. One issue that has greatly perplexed states is how to
superimpose these new concepts of consumer-oriented, homelike residential facilities
on a large existing stock of nonmedical residential facilities (see Table 2 for a
comparison of the number of nonmedical residential and nursing home beds by ANF
state), which has been all but ignored by national and many state policymakers. For
20 Tilly, J. and J.M. Wiener. Consumer-Directed Home Care Programs: Experience of
Beneficiaries, Caregivers, and Workers. Washington, The Urban Institute, 2000.
21 However, there are disadvantages, including increased risk for people with cognitive
impairments. Although fear of substandard consumer-directed care is a major barrier to its
expansion, limited quantitative and qualitative data provide little evidence of lower quality
care for beneficiaries who direct their own care compared to agency-directed services. Ibid.
22 Mollica, Robert. State Assisted Living Policy, 1998. Augusta, National Academy for State
Health Policy, 1998.

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example, while Florida has 81,000 nursing home beds, it also has over 67,000
residential facility beds. Moreover, residential settings of care are expanding rapidly
in many states and are usually not subject to the certificate of need restrictions that
apply to nursing homes. Going by a wide variety of names, including community-
based residential facilities (in Wisconsin), adult homes (in New York), Level IV
nursing homes (in Massachusetts), and assisted living facilities (in Florida and
Michigan), these settings are often viewed as more institutional than homelike in
character.
Another major issue concerns how to regulate these facilities in a way that allows
individuals to age in place without having to move to obtain needed services, but at
the same time prevent these facilities from becoming unlicensed nursing homes. While
persons residing in nursing homes are more severely disabled than those in assisted
living facilities, a recent study found that 34% of people in assisted living facilities had
cognitive impairment and 24% needed help with three or more of the activities of
daily living.23 The problem is that federal and state regulatory structures are built on
the concept of a continuum of care in which individuals move from one level to
another as they become more disabled. However, the whole notion of allowing
individuals to age in place means bringing services to individuals in their “homes,”
wherever they may be, as they become more disabled.
Finally, states are concerned about how to make these new residential options
available to the moderate and lower-income elderly population. Outside of Oregon,
most assisted living facilities are expensive and geared to upper-income older persons.
A recent analysis found that assisted living facilities were not affordable for most
moderate and low-income persons age 75 and older unless they used their assets to
help pay for the cost.24 In Alabama, Minnesota and Wisconsin, some critics contend
that middle-class individuals exhaust their private resources paying for their care in
residential facilities and, once impoverished, apply to nursing homes as Medicaid
residents. Further, to the degree that some assisted living facilities are affordable for
low- and moderate-income older persons, they are more likely to offer minimal
services and less privacy than more expensive facilities.25
Integrate Acute and Long-Term Care Services through Managed Care.
Older persons who need long-term care services currently encounter a fragmented
financing and delivery system. Financing acute care is largely the province of
Medicare and the federal government, whereas long-term care is dominated by
Medicaid and state governments. Because of the separation of financial
responsibilities, there exists a strong incentive for the federal government to shift costs
to the states and vice versa.
23 Hawes, C., M. Rose, and C.D. Phillips. A National Study of Assisted Living for the Frail
Elderly: Results of a National Survey of Facilities. Prepared for the Office of the Assistant
Secretary for Planning and Evaluation, Office of Disability, Aging, and Long-Term Care
Policy, U.S. Department of Health and Human Services, U.S. Department of Health and
Human Services, December 1999.
24 Ibid.
25 Ibid.

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There is also a lack of coordination in the delivery of services. For example,
some nursing home residents are unnecessarily discharged to a hospital because
adequate physician services are not available in the long-term care facility. A major
consequence of this fragmentation may be that total costs are higher than they would
be in an integrated system.
There is strong interest among state policymakers in finding ways to integrate
acute and long-term care, primarily through expanding the role of managed care and
capitated payments to include long-term care services. States have four goals in
integrating acute and long-term care services. First, they hope that they will achieve
better quality care, with providers no longer hamstrung by arbitrary divisions between
acute and long-term care. Second, they seek lower costs, as providers substitute
lower cost ambulatory and home-based care for more expensive hospital and nursing
home care. States also hope to save money by explicitly shifting costs to Medicare
for individuals eligible for both Medicaid and Medicare or by claiming most of the
potential savings for Medicaid. Third, some states, such as Massachusetts, Minnesota
and Wisconsin, have a conscious strategy of trying to reduce the number of providers
with whom they must deal directly so that officials can focus on setting contract
standards and monitoring performance. Finally, as with all capitation strategies, states
use per person payments to shift much of the financial risk of unforseen cost increases
from the government to providers, making state spending more predictable.
A number of states, including California, Colorado, Massachusetts, New York,
Texas, Washington, and Wisconsin, have Program of All-inclusive Care of the Elderly
(PACE) or Social Health Maintenance Organization (Social HMO) sites that
represent some of the first acute and long-term care integration models.26 While these
demonstrations have required state participation in Medicaid waivers, they have not
been primarily state initiatives. State officials are generally supportive of these
demonstrations, but they are looking for “purchasing strategies” that can enroll
thousands of Medicare and Medicaid dually-eligible individuals, and the PACE and
Social HMO demonstrations do not provide that mechanism. Enrollment in these
demonstration programs has been very limited; for example, each PACE site generally
enrolls only about 300 persons.
Many states are planning initiatives or already are enrolling individuals in
managed care programs that integrate acute and long-term care services. However,
so far, most of these efforts are small in scale and preliminary in their planning and
implementation. Especially notable are Minnesota’s Senior Health Options
demonstration, Colorado’s Integrated Long-Term Care Financing Project, Florida’s
Long-Term Care Community Diversion Pilot Project, Texas’ STAR+Plus Integrated
Care Project, and Massachusetts’ Senior Care Organizations. Although there are
26 PACE demonstration sites operate as geriatrics-oriented, staff-model HMOs that provide
the complete range of acute and long-term care services to people who meet nursing home
admission criteria. Social HMOs extend the traditional HMO concept by adding a modest
amount of long-term care benefits. They seek to enroll a cross-section of the elderly
population in terms of disability levels. Other demonstrations, such as the Wisconsin
Partnership Program, seek to modify the PACE model by eliminating the requirement to use
adult day center services and by allowing participants to bring in their own physician.

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exceptions, most of these efforts borrow from the PACE projects in their focus on
dual eligibles (although not PACE’s focus on people at risk of institutionalization) and
from the Social HMOs in their general use of conventional HMOs rather than
organizations that specialize in care of the elderly or younger people with disabilities.
Some states, such as New York, Michigan, and Wisconsin, are beginning the process
by integrating long-term care alone, without adding acute care services.
At this point, however, there is more discussion and debate than action: many
of the projects are still in planning stages or have encountered obstacles to
implementation. For example, Colorado’s Integrated Long-Term Care Financing
Project was slated for implementation in November of 1999, but was halted because
the health plan dropped out because of a dispute with the state related to its Medicaid
managed care program. Wisconsin dropped its ambitious plan to integrate acute and
long-term care services because of opposition from counties and advocates for older
people (discussed below).
In part, the slow pace of integration is because almost all of these initiatives
require Medicaid and sometimes Medicare research and demonstration, freedom-of-
choice, or home and community-based services waivers. States have generally found
negotiations with HCFA and the federal Executive Office of Management and Budget
(OMB) to be difficult on two major points. First, some states want Medicare
payments to be made to the state, who would then combine them with Medicaid funds
into a single capitation payment to the managed care organizations, but HCFA has
steadfastly maintained that it will not “block grant” the Medicare program to the
states. As a result, Medicare and Medicaid capitation payments are made separately.
Some states, such as Texas, contend that this leads to fragmentation within the
managed care organizations and hampers service integration. Within this context, the
federal government has also been suspicious that the states are trying to shift
Medicaid costs to Medicare and capture all the savings for themselves.
Second, some states would like power to make enrollment mandatory. In part
because the combination of Medicare and Medicaid benefit packages for the elderly
are already so comprehensive, states fear that enrollment in these integrated systems
will be slow to modest if it is allowed to be voluntary; from the point of view of
beneficiaries, there is simply not a compelling reason to join these managed care
organizations. HCFA, however, has insisted that dual eligibles are Medicare
beneficiaries first and foremost and, therefore, are entitled to freedom of choice of
providers for Medicare services.27 Thus, it has rejected efforts to make enrollment
mandatory for Medicare services, and most states have abandoned any hope of doing
so.
Like all managed care initiatives, the integration of acute and long-term care
services can potentially realign how services are delivered and financed in dramatic
27 HCFA does allow states to require dual eligibles to join HMOs for Medicaid-covered
services, but does not allow states to require beneficiaries to receive Medicare services
through the HMOs. If beneficiaries choose to receive services outside of the managed care
organization, then either the state or the managed care organizations must pay the applicable
deductibles and coinsurance.

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ways that not all agree are desirable. For example, in May 1997, the Wisconsin
Department of Health and Family Services proposed to “redesign” the public long-
term care system across the age spectrum by relying on managed care and a single
capitated payment to integrate acute and long-term care. The redesign also would
have created county-level resource centers to provide a single point of entry for
information and counseling and access to services. The nursing home industry was
generally supportive of the plan because it believed that it would financially benefit
from the substitution of nursing home for hospital care. The proposal, however, was
withdrawn in response to heavy criticism from elderly and disability advocacy groups
and county officials, and now includes only long-term care services.
Opponents of the redesign were critical of the state’s reliance on conventional
managed care organizations to meet the long-term care needs of individuals.
Specifically, opponents of the redesign believed that HMOs in Wisconsin had little
experience or skill with the elderly or with long-term care. Despite relatively high
market penetration by HMOs for the nonelderly population, low Medicare payment
rates have meant that Wisconsin HMOs have not enrolled many older people. Thus,
they may not be skilled in providing services to this vulnerable population.
Joining acute and long-term care services could also have an adverse effect on
long-term care, according to critics. Fiscal pressures within an integrated system
could short-change long-term care by shifting funds from long-term care to acute care
if providers do not view long-term care as a priority or if acute care overruns its
budget. In addition, long-term care may become over-medicalized and services less
consumer-directed because the balance of power might shift from the individual client
and her chosen provider to HMOs, insurance companies, or other administrative
entities. Home care providers in Wisconsin, who have little experience with managed
care, were also concerned about their relative negotiating strength and the potential
bias of managed care toward institutional care that could result. Finally, counties
were concerned that the redesign would diminish their substantial historic role in long-
term care service delivery, since not all counties would be willing to bear the financial
risk of a capitated model. These criticisms are not unique to Wisconsin; they are
indicative of concerns shared by many long-term care advocates, especially in states
where there is a well developed set of home and community-based providers.
A final factor in the slow pace of integration initiatives is the recent turmoil in
Medicaid managed care and Medicare managed care efforts. Managed care programs
have been plagued with highly publicized financial instability and plan withdrawals.
Many mainstream, “commercial” plans have withdrawn from Medicaid, often leaving
Medicaid-only plans the dominant participants.28 Moreover, the pace of enrollment
in Medicare managed care plans has slowed in recent years and some HMOs have
withdrawn from the market, making it more difficult for states to build on a robust
elderly-oriented managed care market.29 In part, this reflects a backlash against
28 Kilborn, P.T. Largest HMOs Cutting Poor and the Elderly. New York Times, July 6,
1998. p.1.
29 Medicare enrollment increases in managed care totaled 28,000 beneficiaries a month from
January to June 1999, compared to 91,000 beneficiaries a month in 1997. The number of
(continued...)

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CRS-18
managed care plans in general and their efforts to reduce costs.30 Neither program has
proved thus far to be uniformly successful in bringing about improved access and
quality, or cost containment, making all parties – state and federal officials, health
plans, and consumers and their advocates – cautious about expanding managed care
to the frail elderly population.
Increase Private and Federal Resources
One general strategy that states are using to control spending is to bring
additional private and federal resources into the long-term care financing system in
order to offset state expenditures. Bringing outside resources to offset state long-
term care expenditures could be done in several ways, including: encouraging
purchase of private long-term care insurance; more strictly enforcing prohibitions
against transfer of assets; and, maximizing Medicare and Medicaid financing for long-
term care services. The first two approaches build on the observation that a
substantial proportion of Medicaid nursing home residents were not poor before they
entered the nursing home. The last strategy is rooted in the fact that long-term care
has many sources of government financing and that states can minimize their own
spending by shifting costs from state-only programs to Medicaid and from Medicaid
to Medicare, thus increasing federal expenditures.
Encourage Private Long-Term Care Insurance. For the middle class nursing
home population eligible for Medicaid, private long-term care insurance possibly
could prevent both their impoverishment and subsequent Medicaid expenditures.
Currently, however, only about 8% of the elderly have any type of long-term care
insurance.31 A primary reason for the lack of purchase is the high cost of long-term
care insurance, which can exceed $2,300 for a good quality policy purchased at age
65.32 By most estimates, only 10% to 20% of the elderly can afford private long-term
care insurance.33 Wiener et al. found that long-term care insurance policies are
29 (...continued)
HMOs participating in Medicare declined over the 2 year period. Health Care Financing
A d m i n i s t r a t i o n , M e d i c a r e + C h o i c e : C h a n g e s f o r t h e Y e a r 2 0 0 0 ,
[http://www.hcfa.gov/medicare/mcanch13.pdf], accessed April 24, 2000.
30 Blendon, R.J., M. Brodie, J.M. Benson, D.E. Altman, L. Levitt, T. Hoff, and L. Hugick,
Understanding the Managed Care Backlash. Health Affairs, v. 17, no. 4, July/August, 1998,
pp. 80-94; and, M. Peterson, ed., Managed Care Backlash: Special Issue, Journal of Health
Politics, Policy and Law, v. 24, no. 5, October 1999.
31 Authors’ estimate based on data from S. Coronel, Long-Term Care Insurance in 1997-
1998, Washington, Health Insurance Association of America, 2000; and M. Cohen, personal
communication.
32 Ibid., Coronel.
33 Wiener, J.M., L. H. Illston, and R. J. Hanley. Sharing the Burden: Strategies for Public
and Private Long-Term Care Insurance. Washington, The Brookings Institution, 1994;
Crown, W.H., J. Capitman, and W.N. Leutz, Economic Rationality, the Affordability of
Private Long-Term Care Insurance, and the Role of Public Policy, The Gerontologist, v. 32,
no. 4, 1992. p. 478-485; and, Rivlin, A.M. and J. M. Wiener, Caring for the Disabled
(continued...)

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unlikely to have much impact on Medicaid long-term care expenditures because
coverage is affordable mostly to people who would not spend down to Medicaid
without insurance.34 However, Cohen et. al. had more optimistic projections.35
In order to expand private long-term care insurance, states are adopting three
strategies. First, 18 states offer tax incentives to individuals or employers to purchase
private long-term care insurance.36 These state tax deductions or credits are almost
all very small (typically worth $200 or less) and are unlikely to make private long-
term care significantly more affordable. Advocates generally argue that the incentives
are important, nonetheless, because they put states “on the record” as supporting
private insurance.
Second, 19 states either offer or are preparing to offer private long-term care
insurance to their employees, retirees, and, in some cases, parents and parents-in-law
of employees.37 All of these offerings are on an employee-pay-all basis. Aside from
providing a fringe benefit to employees, states hope to be a “model employer,”
stimulating offerings by large companies. So far, however, take-up rates have been
extremely low – well under 5% of eligible individuals have enrolled (except in
California, where it is slightly higher).38
Third, Connecticut, Indiana, California, and New York have established
“public/private partnerships” to encourage the purchase of private long-term care
insurance.39 Under these partnerships, states allow individuals who purchase a state-
approved private long-term care insurance policy to keep far more assets and still
qualify for Medicaid. In the Connecticut partnership model, for example, consumers
purchase a level of private coverage equal to the amount of assets that they wish to
protect. An individual who purchases a policy that pays $100,000 in benefits can
keep $100,000 in assets and still qualify for Medicaid nursing home benefits. In New
York, individuals can protect an unlimited amount of assets from spend-down by
purchasing 3 years of a state-approved private long-term care insurance coverage.
Individuals in nursing homes in the four states must still contribute all of their income
towards the cost of care except for a small personal needs allowance.
33 (...continued)
Elderly: Who Will Pay? Washington, The Brookings Institution, 1988.
34 Ibid. Wiener and Rivlin.
35 Cohen, M.A., N. Kumar, and S.S. Wallack. Long-Term Care Insurance and Medicaid.
Health Affairs, v. 13, no. 4, fall, 1994. p. 127-139.
36 Wiener, J.M., J. Tilly, and S.M. Goldenson. Federal and State Initiatives to Jump Start the
Market for Private Long-Term Care Insurance. Elder Law Journal, in press 2000.
(Hereafter cited as Wiener, Tilly, Goldenson, Long-Term Care Insurance.)
37 Ibid. This initiative is mirrored at the federal level by President Clinton’s proposal to offer
private long-term care insurance to federal employees, retirees, and others, which was enacted
on September 19, 2000. (P.L. 106-265).
38 Ibid.
39 Ibid.

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Under these Medicaid initiatives, it is possible to obtain lifetime asset protection
without having to buy an insurance policy that provides unlimited coverage.
Proponents of this approach contend that the goal is not asset protection, per se, but
rather a means to preserve financial autonomy toward the end of life. Other states
have considered similar approaches, but have not implemented them because of
requirements for estate recovery imposed by the Omnibus Budget Reconciliation Act
(OBRA) of 1993.40
By all accounts, the number of people purchasing partnership policies has been
modest. As of 1999, the four states have spurred the purchase of fewer than 53,000
policies, despite there being approximately 7.2 million older people in these states.41
Thus, the partnerships have failed the market test, at least so far. This may reflect the
lack of appeal of easier access to Medicaid on the part of potential enrollees and the
unwillingness of insurance agents to aggressively market these policies.
Reduce “Medicaid Estate Planning”. Over the last several years,
policymakers and the media have focused attention on middle-class and wealthy
elderly persons who transfer, shelter and under-report assets in order to appear
artificially poor so that they can qualify for Medicaid-financed nursing home care.42
The goal of this transfer – often called Medicaid estate planning – is to appear poor
on paper and yet preserve private wealth in the face of long-term care expenses.
Congress has legislated against these practices on numerous occasions, most recently
in the Balanced Budget Act (BBA) of 1997, which made it illegal for lawyers and
financial advisors to advise senior citizens on transferring assets to qualify for
Medicaid assistance upon entering a nursing home. Some observers argue that the
legislative prohibitions are easy to circumvent and that the prevalence of Medicaid
estate planning has increased dramatically in recent years.
While the rhetoric surrounding the issue is passionate and all states acknowledge
it as somewhat of a problem, only in Massachusetts, New Jersey, and New York
among the ANF states is asset transfer thought to be widely prevalent (although no
systematic data are available).
Asset transfer is of particular concern to policymakers in New York, where there
are approximately 1,200 elder law attorneys and where newspaper and magazine
advertisements relating to asset transfer are ubiquitous. Especially in New York, the
litigious culture and the hostility of the state courts to rules requiring the middle class
40 The OBRA of 1993 requires states to recover the cost of Medicaid financed long-term care
from the estates of Medicaid beneficiaries. The four states now operating partnership
programs plus possible future programs in Iowa and Massachusetts were allowed to exempt
insurance-related protected assets from a person’s estate. Thus, in all other states, while
additional assets may be protected when the individual is alive, persons who become Medicaid
beneficiaries by virtue of these partnership initiatives may not be able to pass on these
additional funds to their heirs, substantially lessening the appeal of this approach.
41 Wiener, Tilly, and Goldenson, Long-Term Care Insurance.
42 Burwell, B. and W. H. Crown. Medicaid Estate Planning: Case Studies of Four States,
in Wiener, J. M., S. B. Clauser, and D. L. Kennell, editors, Persons with Disabilities: Issues
in Health Care Financing and Service Delivery, Washington, Brookings Institution, 1995.

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to impoverish themselves make cracking down on asset transfer difficult.
Nonetheless, state officials believe that reducing asset transfer is a critical prerequisite
to motivating people to purchase the partnership long-term care insurance policies
and, more generally, to view long-term care as a private rather than public
responsibility. In their view, there is little reason to buy insurance if one can protect
family assets by transferring them to relatives. The New York State Bar Association
has successfully challenged the constitutionality of federal legislation in the BBA of
1997.
Maximize Federal Financing. Public funding for long-term care for the elderly
includes Medicare, Medicaid, and state-only funded programs. Medicare is, of
course, entirely federally funded and Medicaid is mostly federally funded. Thus, to
the extent that states can shift the source of funding for long-term care from state-
funded programs to Medicaid and from Medicaid funding to Medicare, states can
potentially limit or reduce their own expenditures.
Over the last 10 to 15 years, several states, including California, Massachusetts,
and Wisconsin, have moved home care programs funded solely with state and county
funds into the Medicaid program. For example, personal care became a covered
option in California in 1993, effectively making a large portion of the In-Home
Supportive Services program a Medicaid service eligible for a 50% federal match.
Similarly, in 1987, Wisconsin moved a substantial part of its state-funded Community
Options Program into a Medicaid home and community-based services waiver. While
California and Wisconsin have obtained additional federal contributions by maximizing
Medicaid, each state has also maintained large, state-only portions of the programs
which are not subject to the federal requirements of the Medicaid program. However,
the possibility of further transfers is limited by the fact that states only spent under $2
billion nationally in 1997 on state-funded home care programs, mostly for people who
could not financially qualify for Medicaid.43 Thus, there is only a modest pool of
dollars potentially available to be refinanced.
States have long sought to shift Medicaid long-term care expenditures to
Medicare, but have been frustrated historically by the narrow range of nursing home
and home health services covered by Medicare. That situation changed dramatically
in 1989, when Medicare coverage rules were liberalized. Medicare expenditures for
home health and skilled nursing facility (SNF) care increased dramatically, peaking in
1997 when they accounted for almost 16% of Medicare expenditures.44 Medicare
spending for home health has declined and in 1999 totaled $10 billion, which still
dwarfed the $3.8 billion spent by Medicaid on home and community-based services
for the elderly in 1997.45 While Medicare primarily provides short-term, post acute
43 Kassner, E. and L. Williams. Taking Care of Their Own: State-Funded Home and
Community-Based Care Programs for Older Persons. Washington, AARP, 1997.
44 Figure 11. Percent Distribution of Medicare Program Payments, by Type of Service: CYs
1967 and 1997. Health Care Financing Review, Statistical Supplement 1999. p. 29.
45 U.S. Congressional Budget Office. An Analysis of the President’s Budgetary Proposals
for Fiscal Year 2001. Washington, GPO, 2000.

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CRS-22
care for nursing facility care, its home health benefit has become substantially more
long-term in character in recent years.46
In response, some states have initiated Medicare maximization efforts in an
attempt to reduce Medicaid long-term care expenditures. These efforts seek to ensure
that Medicare rather than Medicaid pays for home health and nursing facility care
whenever possible. These efforts take the form of provider and consumer education
about Medicare benefits, data system improvements to identify people dually eligible
for both Medicare and Medicaid and instances of inappropriate billing, and
requirements that all home health providers be Medicare – as well as Medicaid –
certified and that they bill Medicare where there is the slightest chance of
reimbursement. Partly reflecting these initiatives, one study of Medicare and
Medicaid home health expenditures during the mid-1990s suggested an inverse
relationship between Medicare and Medicaid home health spending.47
Medicare reimbursement cuts in the BBA of 1997 combined with efforts to crack
down on fraud and abuse have had a dramatic impact on skilled nursing facilities and
home health agencies, potentially making Medicare maximization much more difficult.
For example, Medicare home health expenditures declined by 45% between 1997 and
1999.48 The number of Medicare-certified home health agencies dropped from 10,444
in 1997 to 7,747 in 1999.49 In addition, several major nursing home chains have filed
for bankruptcy protection, which the industry claims is due to Medicare
reimbursement changes and which the U.S. General Accounting Office (GAO) largely
attributes to poor business decisions.50
Traditional Strategies To Control Spending
If states do not succeed in reducing the rate of increase in long-term care
expenditures through delivery system reform or by increasing outside resources, there
are still a number of more conventional mechanisms that states can use, including cuts
in reimbursement and limiting the supply of providers. Existing federal law gives
states considerable flexibility in these areas.
Cut Reimbursement Rates. Medicaid payment rates for nursing facility care
are a logical target for states trying to reduce the rate of growth in long-term care
expenditures for the elderly. Whereas the effects on expenditures from reforms such
46 Ibid.
47 Kenney, G., S. Rajan, and S. Soscia. Interactions between the Medicare and Medicaid
Home Care Programs: Insights from States. Health Affairs, v. 17, no. 1, January/February
1998. p. 201-212.
48 Pear, R. Medicare Spending Care at Home Plunges by 45 Percent. New York Times, April
21, 2000. p. 1.
49 National Association for Home Care. Basic Statistics About Home Care.
[http://www.nahc.org/Consumer/hcstats.html.]
50 U.S. General Accounting Office. Skilled Nursing Facilities: Medicare Payment Changes
Require Provider Adjustments, But Maintain Access. HEHS-00-23, Washington, December
14, 1999.

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CRS-23
as expanding home and community-based services and integrating acute and long-
term care through managed care are uncertain, the impact of nursing home rate
reductions on state budgets is predictable, immediate, and potentially large. As can
be seen in Table 5, there is significant variation among the ANF states in Medicaid
nursing home reimbursement. (An important caveat in comparing the state rates is
that some rates include ancillary services, such as physical therapy, while others do
not.) While some of this variation reflects different levels of service provision, it
might also be indicative of real differences in how generous (or frugal) states are in
nursing home reimbursement.
Table 5. Average Medicaid Rates for Nursing Facility Reimbursement
by ANF State, 1998
State
Per diem rates
Alabama
$98.69
California
$83.12
Colorado
$101.55
Florida
$97.99
Massachusetts
$116.63
Michigan
$96.05
Minnesota
$106.65
New Jersey
$80.60
New York
$158.93
Texasa
$71.11
Washington
$116.00
Wisconsin
$91.70
United States
$95.72
Source: C. Harrington et al. 1998 State Data Book on Long Term Care Program and Market
Characteristics. San Francisco: The University of California San Francisco, 1999.
a Composite of two rates ($70.83 1/97-8/97 and $71.69 9/97-12/97).

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CRS-24
Between 1980 and 1997, the “Boren amendment” governed how states
reimbursed nursing homes under Medicaid. The amendment required that rates be
“reasonable and adequate to meet the costs which must be incurred by efficiently and
economically operated facilities in order to provide care and services in conformity
with applicable state and federal laws, regulations, and quality and safety standards”
(Section 1902(a)(13) of the Social Security Act).
Strongly opposed by the states, the Boren amendment was repealed as part of
the BBA of 1997. States now have almost complete freedom in setting nursing home
payments rates, except for the requirement to hold public hearings. The retention of
the “equal access provision,” a clause within the Medicaid legislation requiring states
to set payments “consistent with efficiency, economy, and quality of care” could
provide nursing homes with some legal protection. However, physicians, home care
agencies, and other noninstitutional providers have not found this standard to be of
much help in forcing higher reimbursement rates. In a few states, including Texas, the
nursing home industry believes that existing state laws can be used to force adequate
payments.
The problem with repealing the reimbursement standard is that Medicaid nursing
home payment rates are already fairly low in many states, especially in comparison to
Medicare and private pay rates. Not surprisingly, then, nursing homes often prefer
higher paying private-pay to Medicaid residents, which can result in problems of
access for Medicaid beneficiaries. To the extent that states cut Medicaid
reimbursement rates and the payment differential between private pay and Medicaid
patients widens, access problems could worsen for Medicaid beneficiaries.
Recognizing this problem, Minnesota and North Dakota require nursing homes to
charge private pay residents the same amount that Medicaid pays, but they are the
only states that do so. However, few nursing homes can survive without Medicaid
residents, limiting the extent to which facilities can reduce access.
In addition, while there is little evidence of a simple relationship between cost
and quality, there is probably some threshold level of reimbursement below which it
is impossible to provide adequate quality of care.51 While the quality of care in
nursing homes has improved over the past 20 years, advocates for nursing home
residents remain extremely concerned about the quality of care provided in many
facilities. A series of GAO studies have highlighted continuing problems of quality
of care in nursing homes.52 In Texas, where poor quality of care has been a constant
51 Wiener, J.M., and D.G. Stevenson. Repeal of the ‘Boren Amendment’: Implications for
Quality of Care in Nursing Homes. New Federalism: Issues and Options for States, Series
A, No. A-30, December 1998.
52 U.S. General Accounting Office. California Nursing Homes: Care Problems Persist
Despite Federal and State Oversight. GAO/HEHS-98-202, Washington, 1998; U.S. General
Accounting Office. Nursing Home Care: Enhanced HCFA Oversight of State Programs
Would Better Ensure Quality. Washington, GAO/HEHS-00-6, 1999; U.S. General
Accounting Office, Additional Steps Needed to Strengthen Enforcement of Federal
Standards. GAO/HEHS-99-46, Washington, 1999; and U.S. General Accounting Office.
Nursing Homes: Complaint Investigation Processes Often Inadequate to Protect Residents.
(continued...)

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CRS-25
issue, the nursing home industry contends that the level of care is a direct result of
low payment rates. In response, the state contends that nursing homes have not
always used the money provided to improve care. In many states, the nursing home
industry is fearful that it will be held legally responsible for meeting the federal and
state quality standards, but will not be reimbursed enough to allow them to do so.
The potential impact of the Boren amendment’s repeal on payment rates is
unclear. First, the nursing home industry is politically powerful in every state and may
succeed in maintaining the current level of reimbursement or close to it. To some
critics, the Boren amendment functioned mostly as a legal rationale to provide the
nursing home industry what it wanted. Indeed, because of the influence of the nursing
home industry, the Congressional Budget Office (CBO) estimated that repeal of the
Boren amendment would reduce federal Medicaid long-term care (and hospital)
spending by only $1.2 billion over 5 years, less than a one percentage point reduction
in Medicaid nursing home expenditures.53 Nonetheless, in every state, nursing homes
are very concerned that the Boren amendment’s repeal will leave them vulnerable to
significant Medicaid rate cuts.
Second, in recent years, the rate of increase in Medicaid expenditures has been
modest and state revenues have been extremely strong. Thus, few states have a
pressing need to reduce Medicaid nursing home rates in order to balance their
budgets. The widespread bankruptcies in the nursing home industry, discussed above,
may also have made states cautious about payment decreases. While massive cuts
have clearly not occurred, some states have trimmed rates. For example, New York
extended reimbursement rate reductions that were due to expire; Colorado
implemented a new nursing home rate setting methodology that resulted in savings;
and Texas increased rates in 2000 by only 3.7% even though the nursing home
industry contends that costs increased by 7.0% and many facilities had filed for
bankruptcy protection.54 Anecdotally, some observers note an “attitude adjustment”
in relations between nursing home associations and state government officials in
negotiations over rates, related to the loss of the ability of nursing homes to sue under
the Boren amendment.
Limit the Supply of Long-Term Care Service Providers. Many states have
responded to growing Medicaid long-term care expenditures by limiting the number
of long-term care providers.55 Table 6 details the extent to which ANF states use
52 (...continued)
GAO/HEHS-99-80, Washington, 1999.
53 U.S. Congressional Budget Office. Budget Implications of the Balanced Budget Act of
1997. Washington, August, 1997.
54 Colorado Department of Health Care Policy and Financing, Trends and Program
Highlights, [http://www.chcpf.state.co.us/trends.html]; and, Bureau of National Affairs,
Nursing Homes Crushed as State Sticks to 3.7 Percent Medicaid Reimbursement Hike. BNA
Health Care Policy Report, v. 8, no. 8, February 21, 2000. p. 301.
55 Wiener, J.M., S.G. Stevenson, S.M. Goldenson. Controlling the Supply of Long-Term
Care Providers in Thirteen States. Journal of Aging and Social Policy, v. 10, no. 4, 1999.
(continued...)

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CRS-26
certificate of need and moratoria on new construction or certification for participation
in Medicaid to control the supply of long-term care providers. These efforts have
focused largely on nursing home beds, where the general premise is that any new beds
are likely to be filled with Medicaid residents. A study of the change in the nursing
home bed supply between 1981 and 1993 found that supply control programs did
result in a significant reduction in growth of nursing home beds.56 While most states
limit nursing home beds, fewer states target home care providers and fewer still target
residential facilities.
Certificate of need programs require facilities to obtain state approval before
construction of new facilities or major renovation of existing facilities. In 1998, 38
states had certificate of need programs that reviewed the need for nursing facilities.57
While certificate of need programs can limit nursing home supply, they are usually
required to judge only “need” and to ignore state budgetary concerns. Given a lack
of control over home and community-based services that could arguably be substitutes
for nursing home care, these certificate of need programs often do not have the
technical rationale to find a lack of “need” for more nursing home beds, especially
considering a rapidly aging population. A blunter strategy used by many states is to
pass a law prohibiting new construction of new nursing home beds or a moratorium
on certifying additional beds for Medicaid participation (which would make them
economically unviable). Nationally, as of 1998, 19 states had a moratorium on new
construction of nursing homes.58
Despite moratoria in several ANF states, some expansion – mostly by existing
nursing homes – has occurred, even in the states most restrictive of nursing home
growth. For example, in 1995, when Alabama still had a moratorium in place for
nursing home beds, over 1,000 new beds were built under a provision that allowed
existing facilities to expand in geographic areas of high occupancy. Mississippi and
Texas have made similar allowances for existing nursing facilities in recent years.
While limiting long-term care provider supply is likely to control expenditures
over the short-to-medium term, this strategy raises several issues. The care needs of
the elderly do not disappear just because there are no nursing home beds available.
To the extent that these needs are met by home care and other services, Medicaid
savings will be reduced. Second, nursing home bed/population ratios have already
fallen substantially across the United States, although the situation varies across
states. The number of nursing home beds per 1000 elderly age 85 and over fell by
55 (...continued)
p. 51-72.
56 Harrington, C., J. H. Swan, J. A. Nyman, and Helen Carrillo. The Effect of Certificate of
Need and Moratoria Policy on Change in Nursing Home Beds in the United States. Medical
Care, v. 35, no. 6. p. 574-587.
57 Harrington, C., J.H. Swan, V. Wellin, W. Clemena, and H.M. Carrillo. 1998 State Data
Book on Long-Term Care Program and Market Characteristics. San Francisco, University
of California, 1999.
58 Ibid.

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CRS-27
27% between 1978 and 1998.59 It is unclear how far supply levels can fall without
causing hospital backlogs and other problems. In several ANF states (Alabama,
Florida, Michigan, and Mississippi) that have limited the expansion of nursing homes,
some observers contend that access to nursing home care can be difficult, especially
in rural areas. Finally, freezing provider supply does not address the underlying
demographic reality that the United States is an aging society and the number of
people with disabilities is sure to rise. Therefore, limiting the supply of nursing home
beds could be problematic as a long-run cost containment strategy.
59 Ibid.

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CRS-28
Table 6. Certificate of Need (CoN) and Moratoria in the ANF States, By Provider Type, 1998
Nursing facilities
Home health
Residential facilities
Hospital bed conversion
State
CoN
Moratorium
CoN
Moratorium
CoN
Moratorium
CoN
Moratorium
Alabama
X
X
X
California
Colorado
X
X
Florida
X
X
X
Massachusetts
X
X
X
X
X
X
Michigan
X
X
X
Minnesota
X
X
Mississippi
X
X
X
X
X
X
X
X
New Jersey
X
X
X
X
New York
X
X
X
Texas
X
X
Washington
X
X
X
Wisconsin
X
X
X
X
U.S. (total)a
38
19
19
1
12
4
33
12
Source: C. Harrington el al. 1998 State Data Book on Long-Term Care Program and Market Characteristics.
San Francisco: The University of California San Francisco, 1999.
a Includes the District of Columbia.

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CRS-29
Conclusions
Although the rate of growth for Medicaid long-term care expenditures for the
elderly has slowed in recent years, spending on these services still represents a
substantial proportion of total Medicaid expenditures. The aging of the population
guarantees greater future need for long-term care. Consequently, state policymakers
have sought to reduce the rate of growth in these expenditures through reforming the
organization and delivery of long-term care services, bringing in more outside
resources, and by reducing Medicaid reimbursement and the supply of services.
States differ greatly in their emphasis on one or another of these strategies and how
strongly they are searching for savings. Indeed, especially compared to acute care,
there is enormous variation in state policy on long-term care for the elderly.
One approach is for states to develop more effective and efficient financing and
delivery systems by developing home and community-based services and by
integrating acute and long-term care services through the use of managed care. All
states have a policy commitment to the expansion of home and community-based
long-term care services, although the extent of this commitment varies by state, with
most states spending only a modest amount on noninstitutional services. While the
recent expansion of Medicaid home and community-based care has focused mostly
on younger people with disabilities, efforts are being made to expand services for
older persons. Although some of the recent emphasis on community-based care is
surely based on consumer preferences, a major impetus for this reform is the promise
of cost-savings – an outcome about which research has been equivocal. To achieve
these cost-savings, states will have to be effective in keeping per person costs down
and in limiting the amount of new utilization due to offering additional home care
benefits. Several states have shifted state-funded home care programs into Medicaid,
especially through the use of Medicaid home and community-based services waivers,
taking advantage of the flexibility these waivers offer in terms of services and the
ability to limit enrollment and expenditures. While some states complain about the
paperwork relating to the waiver, few find that the current system prevents them from
doing what they want.
Two relatively new areas of policy development involve consumer-directed care
and nonmedical residential facilities. Although still more common among younger
people with disabilities, states are experimenting with consumer-directed home care
for the older population, where individuals hire, train, direct, and fire their own
workers rather than depend on agencies to perform these functions. The hope is that
these services will produce more consumer satisfaction and cost less. In addition,
most states are debating the use of nonmedical residential care for the elderly as an
alternative to nursing home care. Although a sizeable stock of residential facilities
exists in many areas, states face a number of difficult issues as they consider this
expansion, most notably how to allow people with substantial disabilities to age in
place without making these facilities into substandard nursing homes.
Almost all states are looking to managed care and the integration of acute and
long-term care services as a potential way to reduce the rate of increase in
expenditures. However, many of these efforts are only in the planning stage and
limited in scope. Progress on these initiatives has been slow, in part because Medicaid

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CRS-30
and, often, Medicare, waivers are needed for their implementation. Also, the mixed
experience with Medicaid and Medicare managed care for a less complicated
population has led to a cautious approach to integration.
A second strategy to reduce state expenditures is to substitute private, Medicaid,
and Medicare financing for state funding. While private long-term care insurance has
been heralded by some as a potential fix for rising Medicaid long-term care
expenditures, state tax incentives, offering private long-term care insurance to state
employees and public/private partnerships has not increased the number of people
with private long-term care insurance substantially. While almost all states believe
that Medicaid estate planning is a problem, it is a major concern in only a few states
and the low level of assets held by severely disabled older people make it unlikely that
much money could actually be saved by halting the transfer of assets. While
increasing federal contributions through Medicare and Medicaid maximization are
being used effectively by some states, these strategies simply shift costs to the federal
government. Medicare reimbursement cuts enacted as part of the BBA of 1997
probably make additional cost shifts extremely difficult by making long-stay patients
less desirable to home health agencies. Similarly, BBA changes make Medicare
skilled nursing facility patients less financially attractive to these facilities than was the
case just a few years ago.
In the short run, if faced with an economic downturn, states are likely to rely on
more traditional strategies to reduce spending, such as controlling nursing home
supply and cutting reimbursement rates. Many states are using certificate of need
restrictions or moratoria on new nursing home construction to limit the supply of
services, and, therefore, utilization. While this will probably save money over the
short-to-medium term, it does not address the underlying demographics of an aging
population. With the repeal of the Boren amendment in the BBA of 1997, states will
have much greater legal freedom to impose rate cuts on nursing homes. However,
so far, relatively few states have cut rates, reflecting the good economic times and the
political power of the nursing home industry.
Almost all states complain about the high costs of long-term care for the elderly,
but the hard reality is that the current method of Medicaid long-term care financing
is actually quite economical. Payment rates are much lower than Medicare and the
private sector. Individuals receive government help only after depleting most of their
assets, and they must contribute virtually all of their income toward the cost of care.
Medicaid pays only the costs that the elderly themselves cannot. Finally, the
institutional bias of the delivery system limits services largely to persons with the most
severe disabilities who do not have family supports. Within this system, it is difficult
to obtain large savings. However, the fiscal strains that are inevitable as a result of
the aging of the baby boom generation guarantees that the search for cost savings will
continue.

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