Medicare-Medicare benefits include up to 100 days of nursing home care, but only for people who require skilled nursing or rehabilitative care following a hospital stay-an intensive level of service that accounts for only a very small proportion of all nursing home care. Furthermore, cost sharing, which begins on the twenty-first day of a Medicare stay, is not tied to nursing home costs. Rather, it is set at one-eighth the cost of the Medicare hospital deductible. 39 At $74 per day in 1990, cost sharing in many parts of the country exceeds the cost of nursing home care. In these circumstances, even people who satisfy coverage criteria will not actually receive any benefits.

Historically, Medicare has financed only about 2 percent of the nation's nursing home care. Although recent regulatory changes produced a 40 percent in

crease in Medicare spending, Medicare's share of nursing home expenditures remains negligible.40 Only one in three elderly people entering nursing homes satisfies Medicare's eligibility requirements. Even among short stayers, less than half (45 percent) qualify for any benefit. 41

Not only does Medicare cover a limited proportion of nursing home entrants, it often fails to cover a substantial proportion of nursing home care even for those who receive benefits. An estimated 75 percent of people who receive Medicare remain in a nursing home after the 20 days of full coverage.42

In sum, Medicare's role in nursing home care, as in home care, is more appropriately characterized as fi

scribed below, has since been passed that provides the spouse significantly better protection.

Second, after they have exhausted virtually all their life's savings to pay for care, individuals must spend down their incomes to receive Medicaid benefits. In 30 states Medicaid pays for care if and when the costs of nursing home care exceed people's ability to pay. People are allowed to keep a small amount ($30 a month, typically) for personal needs and, as described below, some income is protected for spouses at home. All remaining income must be devoted toward the cost of care; Medicaid pays the difference between what people contribute and the nursing home reimbursement rate.

"We don't usually think of it this way, but the Medicaid program for nursing home care is actually an entitlement that has a deductible of one's entire income minus... about $30 a month."

-Dr. Rosalie Kane, professor of social work and public health, University of Minnesota

nancing extended medical or acute care than as longterm nursing home care.

Medicaid Medicaid, the federal/state welfare program that also finances health care for the poor, provides 90 percent of the public financing for nursing home care, and more than 40 percent of all nursing home revenues.43

Medicaid is a payer of last resort. Disabled people with incomes and resources low enough to qualify for cash welfare assistance under the Supplemental Security Income (SSI) program are eligible for benefits. Others qualify only by spending down their assets and income on the cost of care until they become eligible for Medicaid coverage.

People spend down to Medicaid eligibility in a twostage process. 44 First, to obtain Medicaid benefits, people's resources or assets (typically excluding the home, at least for a period of time) must be less than a specified amount.45 In most states, that amount was $2,000 in 1989 for an individual without a spouse, the same level used for SSI program eligibility. Until September 1989, the amount for a person with a spouse was $3,000, essentially impoverishing the spouse as well as the nursing home resident. Legislation, de

Twenty states, however, will not cover nursing home care for people whose income exceeds a certain amount, even if that income is less than the cost of this care. The income cutoff is typically set at three times the SSI payment standard (approximately twice the poverty level)-about $1,100 per month in 1989the maximum allowed by federal law. In these states, disabled people whose incomes are too high to qualify for Medicaid but too low to pay nursing home rates must remain in the community, rely on family and others to cover the balance of the costs of care, or find a nursing home willing to accept what they are able to pay.

Concern that Medicaid spend-down requirements were impoverishing not only nursing home residents but also spouses remaining at home led Congress to liberalize eligibility standards. Provisions in the Medicare Catastrophic Coverage Act of 1988 that remain in effect require states to provide spouses a specified level of asset and income protection when determining amounts that residents must contribute to the costs of care. As of September 1989, spouses could keep a minimum of $12,000 in assets, or half of the couple's total assets, up to a maximum of $60,000. States could raise the minimum spousal protection, up to $60,000; 13 states have done this. Regardless of the minimum, however, any assets above the $60,000 have to be applied to the costs of the resident's care. Spouses are also guaranteed minimum income protec

tion. This protection, which will be fully phased in by July 1992, will allow the spouse of a nursing home resident to retain a monthly income of up to 150 percent of the federal poverty level for a couple (or about $1,000 in 1989). Additional amounts for certain housing expenses could bring total protection to a maximum of $1,500 per month. (These amounts are indexed.)

These changes establish a floor of protection against impoverishment for spouses of nursing home residents. But most nursing home residents (87 percent) are single and must relinquish all their resources and income to receive public benefits.46 Recent evidence indicates that just over one-third of nursing home users receive Medicaid when they enter the nursing home and another 10 percent to 16 percent spend down their assets to become eligible for Medicaid during their stay. By one estimate, about a quarter of nursing home users spend down to Medicaid. eligibility over their lifetimes. 47

These figures are regarded as low estimates of the proportions who do so, however, because data sources underestimate the people with long stays. Not surprisingly, the likelihood of spending down increases with length of stay. More than three-quarters of people who become sufficiently impoverished to qualify for Medicaid have stays that exceed six months. 48

Even if they do not spend down to Medicaid, nursing home users face the heart-rending prospect of dissipating the savings of a lifetime. Relying on Medicaid means facing the stigma of dependence on a welfarebased system. Elderly people, in particular, feel demeaned by having to apply for public assistance after they have made sacrifices all their lives in order to maintain their financial independence.

But reliance on a welfare-based system poses problems beyond personal anguish. Eligibility for Medicaid does not guarantee access to care of acceptable quality.

Concern about the quality of care Medicaid recipients receive in nursing homes is longstanding and widespread.49 Evidence that many nursing homes do not provide adequate quality of care or quality of life led the Congress to enact major reforms in requirements nursing facilities must meet to participate in Medicaid (and Medicare) and in enforcement of those requirements. These initiatives illustrate the importance of federal involvement in and oversight of nursing home policy to protect citizens in all states.

After lifelong struggles for financial independence, too many elderly people must depend on welfare for long-term care support.

Access to nursing home care, whatever its quality, is also a problem for people who must depend on Medicaid. For nursing home services, as with other services, states have considerable flexibility in setting payment rates for care. As nursing home costs absorbed a growing share of states' spending, states turned to payment controls to keep expenditures in check. 50

Amounts states pay for nursing home care and the methods they use to determine payment rates vary considerably, affecting the number and nature of nursing homes willing to serve Medicaid patients. Stateby-state statistics on Medicaid and private rates are not available. Nationally, however, Medicaid rates are estimated to average 20 percent to 30 percent below private pay rates. 51 Substantial evidence indicates that in these circumstances nursing homes give preference to private pay patients over Medicaid patients. Furthermore, unless states vary payment rates with patient care needs (and only a few do), nursing homes are likely to favor Medicaid patients needing little care over those needing costly and intensive service. Federal law and regulation aim to prevent active discrimination against Medicaid patients. But as long as substantial differentials in payment rates exist, implicitly discriminatory behavior is inevitable.

The more limited the supply of nursing home beds, the more likely it becomes that Medicaid patients will

have difficulty obtaining access to care. High occupancy rates and research studies indicate that the demand for nursing home care has long exceeded the supply of nursing home beds. 52 Encouraged by federal law until the mid-1980s, many states made considerable efforts to regulate nursing home construction. Partly due to those efforts, the supply of beds has not kept pace with growth in the elderly populationmost importantly, with the particularly rapid growth in the population over age 85, the group most likely to need institutional care. While the number of nursing home beds increased 15.8 percent between 1977 and 1985, the number of beds per elderly person declined. 53 Among the population age 85 and over, the number of beds per 1,000 people declined nearly 14 percent over that period. 54

As virtually the only protection for people needing nursing home care, Medicaid has played an invaluable role in financing care for the people who need it. But as a welfare-based payer of last resort-financing care only after people have used up everything they have-Medicaid's protection is intrinsically limited. Furthermore, Medicaid's capacity to serve people adequately, even after they have exhausted their resources, is a function of states' willingness and ability to pay for nursing home care. Experience raises serious question as to whether that capacity is sufficient to meet people's needs.

THE ROLE OF PRIVATE LONG-TERM CARE INSURANCE

Although private insurance is still an insignificant source of long-term care financing-less than 2 percent-free-standing long-term care insurance has experienced spectacular growth in the last three years. In 1986 fewer than 15 insurers were selling long-term care insurance policies of some type. By the end of 1989, 118 companies (including most of the larger insurance companies) were marketing policies, representing an increase of 12 percent over 1988.55 Since 1987, the number of policies sold has more than doubled-increasing from 423,000 to more than 1.5 million. 56

Development of the Market

The market for private long-term care insurance has been slow to emerge. 57 Insurers have been reluctant to offer coverage in the face of considerable risk that premium revenues will be insufficient to cover benefit expenses. Insurers face the risk that only persons likely to use services will buy insurance (adverse

selection); and that once insured, people are more likely to use services and will use more services than they would have without the insurance (moral hazard). Equally important, they face considerable uncertainties about future home care and nursing home care prices, disability rates, mortality rates, and nursing home and home care use rates.

These risks are more severe for coverage of longterm care, even though they exist for other types of insurance, for two reasons. Long-term care is more difficult to define and easier to use than health care because it includes personal as well as medically oriented services. Moreover, the need for long-term care may not arise until 20 to 40 years after the policy is purchased.

Recent growth in private long-term care insurance does not mean these risks to insurance have been eliminated. Rather it means that insurers have designed and marketed policies to limit their financial liability in order to protect their solvency.58 First, insurers do not sell policies to persons who are already disabled. Insurers' efforts to limit their risks, in fact, may lead them to define "disability” in a way that excludes people with health conditions like circulatory disorders or arthritis, regardless of individuals' ability to function. Similarly, insurers either do not sell, or charge substantially higher rates, to older elderly, who are most likely to need long-term care.

Second, the policies initially on the market (which still constitute the bulk of policies in effect) included a number of benefit restrictions. Among them were exclusions for specific conditions (such as Alzheimer's disease), requirements for hospital stays or skilled care before coverage of long-term personal care, and limited coverage of home care (where increases in use stimulated by coverage are of greatest concern). Furthermore, benefits in these early policies were specified in fixed dollar terms (for instance, $50 per nursing home day). As a result, a benefit that appeared adequate at the point of purchase might prove to be woefully limited when the purchaser needed services 20 to 40 years later.

Policies have recently been developed that offer broader coverage. New policies specifically cover Alzheimer's disease; benefits are less likely to be contingent on prior use of hospitals or skilled nursing homes; and many of these newer policies include partial protection against inflation. However, most people who have purchased coverage do not hold these newer policies, and to change policies means losing the accumulated value in a policy that is dropped. 59

During the past two years long-term care insurance policies also have expanded their coverage and scope of benefits for home care. Of the 28 policies offered for the first time by members of the Health Insurance Association of America (HIAA) in 1988 and 1989, most paid beneficiaries of home care at 50 percent of the purchased daily nursing home benefit. Thirteen of the plans, however, required a prior nursing home stay to obtain home care benefits, and five of those also required a prior hospital stay.60

Alongside insurers' own efforts to improve policies have come efforts by state regulators to protect consumers. Concern over consumer protection, reinforced by the sales abuse experience and overpriced (relative to their value) Medigap and life insurance policies, led the National Association of Insurance Commissioners (NAIC) to develop a regulatory framework for long-term care insurance. Over the past several years, as the market has developed and products have changed, so too have the model regulations. The NAIC first issued model regulations for states to adopt in 1986. These were substantially broadened in 1987, 1988, and 1989.61 Two-thirds of the states have adopted some version of the NAIC regulations or even more stringent regulations, but most of the states have not kept up with all the changes. 62 And while the NAIC continues to respond to the changing market, it has not yet addressed all the issues confronting consumers.

The long-term care market continues to pose considerable risk despite insurer and regulator efforts.

First, inflation protection remains limited, potentially exposing people with coverage to substantial costs should they need care.

Second, many policies still limit their period of coverage. A 1988 analysis of 29 policies conducted by the HIAA found that 28 limited the length of the coverage period, typically to a maximum of four or five years.63 Since it is estimated that among people who use nursing home care, almost one in five will exceed five years of care over their lifetimes, these maximum lifetime benefit provisions would severely limit protection. 64

Third, even though regulation may prohibit insurers from raising premiums or canceling policies for specific individuals, insurers are allowed (and may find it necessary) to raise premiums for groups-or cancel whole sets of policies-if financial experience warrants. People who have paid premiums for years can be without protection.

Finally, long-term care insurance is relatively expensive, and the better the protection it offers the more it is likely to cost. The Health Insurance Association of America reports that today, a typical good policy-one that covers home care and four years of nursing home care at $80 a day, and offers some inflation protection-costs, on average, $658 if purchased at age 50; $1,395 at age 65; and $4,199 at age 79.65

Some argue that as elderly people become more aware of the risk they face in long-term care and as better products become more widely available, many elderly-perhaps as many as half-will buy coverage.66 The fact is, however, that only an estimated 3 percent to 5 percent of the elderly population currently own long-term care insurance policies.67 And for many elderly the financial burden of these policies is patently prohibitive. At least 40 percent of elderly people have incomes below twice the poverty level (about $12,000) in 1990. For them, premiums for the typical policy described above would clearly impose an enormous burden. Even for a moderate income 65year-old (with income between 200 percent and 300 percent of the federal poverty level-$12,000 to $18,000) premiums would absorb between 8 percent and 12 percent of income. Only about 6 percent of today's elderly could purchase such a policy using as little as 5 percent of income. 68

Alternatives to free-standing long-term care insurance, such as Social/Health Maintenance Organizations (S/HMOs) and Continuing Care Retirement Communities (CCRCs) or life-care communities, are also available to help finance long-term care. S/HMOs, publicly sponsored demonstrations in four cities, are designed to integrate the concept of insurance with the delivery of long-term care in a manner analogous to health maintenance organizations, on a capitated, per person basis. A recent evaluation of this project indicates that only two S/HMOs have achieved their 4,000 member target enrollments. 69 CCRCs were originally developed to integrate insurance and service delivery with housing. About onethird of the more than 700 CCRCs in the United States offer insurance protection through risk sharing arrangements among residents.70

Both mechanisms aim to control costs through efficient service delivery, making benefit restrictions unnecessary and protection more affordable. However, neither offers a clear-cut strategy for providing good coverage at broadly affordable costs.71 S/HMOs have limited the long-term care services they offer in order to keep their rates affordable. Life care communities exclude people with health problems, usually charge substantial entry fees, and, increasingly, do not