Despite the growth of community-based, long-term care programs that strive to maintain older adults in their own homes, the need for institutional LTC continues to grow in the United States. This is in large part because of the increasing longevity and corresponding functional disability among those who live to extreme old age, decreasing number and geographic proximity of children (especially daughters, who provide the most support to functionally impaired older Americans and who are increasingly joining the work force, thus limiting their caregiving abilities), and economic factors. Although the number of NHs has stayed the same or decreased slightly over the last decade, the number of ALFs has grown substantially, and care for many functionally impaired older adults who would have previously been admitted to NHs. Economic factors are also critical in determining the need for institutional LTC, and are very different in countries with a national health program combined with more ready availability of in-home social support. Thus, to understand the role of institutional LTC in the U.S, one must understand how LTC is financed.

Financing of Long-Term Care

Health care for older Americans is funded in one of four basic ways: (1) private health insurance; (2) Medicare; (3) Medicaid; and (4) out-of-pocket expenditures. Although many insurance companies sell long-term care policies, private insurance still plays a relatively small role in paying for LTC at the present time. Medicare is a federally administered health insurance program for those aged 65 years or older and for a smaller number of younger people who are severely medically disabled and/or who have end-stage renal disease requiring renal replacement therapy. The vast majority of older Americans qualify for basic Medicare coverage by contributions that they or a spouse have made during their working years. Most older Americans still incorrectly believe that Medicare will pay for LTC. It is not until they or a relative needs LTC services that reality sets in. Less than 10% of overall Medicare expenditures go to LTC. Medicare does not pay for in-home support for assistance with activities of daily living (ADLs) on an ongoing basis and does not pay for care in an ALF. Medicare will pay for time-limited skilled services (nursing, rehabilitation therapy) at home or in an ALF after a hospitalization for people who are home-bound. Medicare will also pay for up to 100 days of care in a NH after an acute illness (20 days are fully covered, and thereafter there is a substantial co-payment), but only in certain situations. To qualify for Medicare reimbursement, admission to the NH must follow a 3-day stay in an acute-care hospital, and the patient must require continuous skilled nursing care and/or active rehabilitation with carefully documented potential and progress to achieve a lower level of care. This so-called 3-day rule is highly controversial and incentivizes hospitalizing older people so that they can receive the Medicare benefit for postacute care. This rule is waived for some types of managed care programs (see later).

Thus, the vast majority (>60%) of funding for institutional LTC comes from out-of-pocket expenditures or Medicaid. Medicaid is a state-administered medical welfare program for the poor; one has to have very limited income and assets to qualify, and benefits vary among the 50 states. This has created a phenomenon termed spend down—older Americans must spend down their assets to pay for institutional and noninstitutional LTC until they become poor enough to qualify for Medicaid, which will then cover LTC costs. Because private pay rates for most LTC facilities are in the range of $4,000 to $10,000/month (and in some cases higher), spend down occurs relatively quickly for most older Americans who enter an institutional LTC setting.

In many areas of the United States, the growth of managed capitated systems of care is also substantially affecting LTC. Nationally, approximately one third of older Americans have opted into a Medicare Advantage plan, which is a managed capitated program administered by an insurance company. In these managed capitated systems of care (previously known as a health maintenance organization [HMO]), the insurance company receives a fixed rate for a Medicare beneficiary each month. One of the main ways of saving money in this system is to reduce the number of acute hospitals days. As a result, patients in these health plans are being discharged rapidly from acute hospitals into NHs while still subacutely ill. In addition, because in most capitated systems there is no 3-day acute hospital requirement for Medicare reimbursement of postacute care in a NH, some acutely ill patients may completely bypass the acute hospital. For example, patients in a Medicare Advantage program with deep vein thrombosis or mild pneumonia or cellulitis requiring intravenous antibiotics may be directly admitted to a NH, without an acute hospital stay. These economic incentives are driving the growth of a higher level of skilled care in NHs and are resulting in an unmet need for more highly trained nurses and physicians in this setting.