How Long-Term Care Should Be Financed

How long-term care should be financed
The nuts and bolts of a workable public/private partnership
Providing financial assistance for those who need care but legitimately cannot afford it is a realistic government function. Setting payment rates with little or no regard for actual market forces is not.

As has been demonstrated repeatedly throughout our history, the free-enterprise system is by far the most efficient arbiter of purchase decisions as they relate to both quality and price. The most appropriate course for government, therefore, is to substantially disentangle itself from the arena of payment-system design, concentrating instead on appropriate financing approaches and assuring quality care. In a new charge-based payment environment, providers must be willing to accept the concept and risk of a marketplace where fair and open competition will occur.

To produce maximum efficiency and competition to ensure fair pricing and equal access, long-term care providers must be allowed to establish prices that are acceptable to the free market (probably, in the near future, working in a managed-care’oriented environment). Government would establish the amount it will pay for services (the base price); the difference, if any, would be paid by the patient, either directly or through insurance.

This will, by definition, entail a public/private partnership. Public funds will be available only to those in need of public assistance, and then only to the extent necessary. Private funds will be used to purchase noncovered services, pay for the difference between the “base price” (as mentioned above) and the publicly funded portion of the base price, and pay for any covered services that are priced above the base price. Patients will have the freedom to use their own funds (or those of family and friends) to purchase extra services, as well as pay for those services that are priced above the “base price.” This would avoid the “all or nothing at all” restrictions inherent in current policy.

Under this proposal, every resident would effectively become economically equal from the providers’ point of view. The discrimination against government-funded residents, which providers often find necessary to admit for economic survival under the present system, would be eliminated. Depending on available income and patient acuity, the government may have to subsidize many of these patients to one extent or another-but long-term care providers should receive their reasonable market-based charge for every patient, regardless of payer type. In this way, patients will receive the benefits of having true “freedom of choice”.

All of this implies some degree of deregulation. Deregulation of rate-setting within our healthcare delivery system will reduce administrative expense and should produce heretofore untapped efficiencies on the part of long-term care providers, as they strive (often for the very first time) to compete for every resident, not just private-pay residents. Depending on the goals and objectives finally selected, a new and innovative system could even cost fewer government dollars than are currently being expended, while potentially yielding higher-quality patient care.

Now the big question: If free-market forces determine the charges set by each individual provider, what portion of those charges should be funded by government? I would submit that the answer encompasses four basic steps:

Step 1: The Income/Asset-Based Health Benefit Schedule
As suggested, any new program should make maximum use of available private resources, while providing assistance only where it is truly required. Therefore, maximization of private resources should include tighter restrictions on asset transfers, greater use of reverse mortgage programs, and the use of other tools ensuring that public funds do not supplant private resources. An equitable health benefit schedule could be developed using readily available income distribution tables, disposable income data, and the average charges applicable to long-term care services within each geographic area. While social policy and fiscal limitations should play a part in designing an appropriate benefit schedule, we would suggest that “available income” should:

  • include all current income (including interest and dividends), as well as all income attributable to any form of asset transfer that occurred in the preceding ten-year period, including annuities and trust fund transfers of all varieties;
  • potentially include an estimated rate of return on significant non-income-producing assets; and
  • exclude income and assets necessary for the reasonable support of a noninstitutionalized spouse and/or dependent children, if any.

Benefits available would depend on a weighted scale ranging from 0 to 100, reflecting available income. For example, an individual below the poverty level might receive a 100% benefit, while a middle-income individual’s health benefit might be set at 50%. An individual who can realistically afford the full cost of long-term care would be expected to do so with no assistance. Again, this is in contrast to the current Medicaid and Medicare systems, under which the choices are essentially either a 0% benefit or a 100% benefit.

General Objectives

To be successful, a new long-term care payment system must meet the following objectives:

  • Promote quality. An appropriate system will encourage both quality care and quality of life for long-term care residents. Toward that end, the system should foster increased family involvement in both direct-care planning and cost-effectiveness.
  • Be affordable. The payment plan must be designed in ways that will make it affordable, considering realistic limitations on personal, state, and federal revenues.
  • Encourage equal access. Long-term care residents must have freedom of choice when selecting a care facility. Furthermore, the system should encourage equal access for all residents regardless of payment source.
  • Ensure proper allocation of resources. Public funding for long-term care should be provided only to those individuals genuinely in need of financial assistance, and then only to the extent that the need exists.
  • Eliminate nonessential overhead (administrative simplicity). Administrative expenses not essential to the provision of care should be eliminated for both providers and government. A properly designed long-term care payment plan should reduce paperwork and decrease the dependence on sophisticated and expensive accounting and legal expertise. The reduction of these unnecessary overhead costs should, in turn, provide additional funds to enhance the quality of services.
  • Encourage a public-private partnership. Overall design of the system should be such that it encourages the development and utilization of effective private insurance products, thus minimizing public expenditures.
  • Vary payment amounts by patient acuity level. To ensure that the medical and other needs of long-term care residents are properly met, the methodology’s design should allow for payment variations based on individual resident acuity (i.e., a case-mix system).

-Steven C. Wolf

Step 2: The Base Price
The next step is to determine the payment amount that would apply in the case of a 100% benefit. This amount could be set at the median cost of purchasing nursing home services at the semiprivate room rate for each state, region, or other meaningful geographic area. There would be no differentiation based on type of provider (for-profit versus nonprofit, hospital-based versus freestanding, etc.); because the product being purchased is the same in all cases, the legal tax status or site of business of the provider is of no relevance.

A simple one-page cost report, including a complete schedule of charges, would be required annually of all facilities in order to determine actual charges and geographic cost differences on an ongoing basis.

Step 3: Adjustments to the Base Price
In determining the benefit level applicable to any given individual, geographic cost differences, as well as the individual’s specific care needs, must be considered:

  • Geographic price differences. Since costs and charges will vary geographically because of variations in labor costs and other factors, the base price would be adjusted to account for these differences. Appropriate adjustment factors would be developed from the cost and charge data submitted annually by all facilities.
  • Required service intensity. To ensure full access for people at all care levels, as well as to ensure that fair and appropriate prices will be paid to providers, individual patient care needs must be considered when setting payment levels. To achieve maximum efficiency, the method of measuring patient acuity should be based on an existing measuring tool, such as the MDS system.

Step 4: The Payment Mechanism
Upon entry into the system, every potential resident will be assessed relative to assets, income, and acuity. These assessments could be performed through the same mechanisms used to presently determine Medicaid eligibility, or they could be performed by some type of case-management organization. The results of an individual assessment will be expressed as a factor that is then multiplied by the 100% benefit rate to determine a per-day amount (see “System Function”).

The individual is then given a health benefit certificate indicating the per-day benefit amount that the evaluating agency has determined to be appropriate for that person. This certificate can be used toward the purchase of long-term care services in any nursing facility that the potential resident may choose. (Periodic recertification of the individual would take place, as it currently does under Medicaid, with adjustments to the benefit amount based on any changes in the individual’s income or acuity status.) Since the health benefit amount is based on the geographic median charges for long-term care services (as adjusted for acuity), and not on some artificial concept of accounting “cost,” individuals will be able to choose among all the long-term care nursing facilities within their vicinity. The prospective resident will moreover be free, if he or she so desires, to choose more expensive facilities or options by paying the additional charges out of pocket.

The important point is that a government established level of service will be provided at no out-of-pocket cost to the truly indigent. More costly services will be available to those who want and are willing to pay for them. When government benefit levels are set in this manner, providers will be competing for each and every patient. That competition can only yield a better quality product at the lowest possible price.

It should further be noted that these same payment concepts could apply to home health services, assisted living, adult day care, residential care, and other forms of long-term care, as well. This could be accomplished either by creating a separate acuity system for each of these services or by applying an acuity-related percentage to the nursing home schedule of benefits. For example, the home healthcare benefit could be set at 50% of the value applicable to nursing home care, 75% for residential care, etc. If the relative percentages among long-term care services are established based on costs, there will be no bias toward any alternative service.

Today’s Medicaid-based long-term care financing systems fail to meet the objectives of a rational reimbursement system (see “General Objectives”), or do so only minimally. If nursing facilities are to survive the impending train wreck posed by baby-boomer demands, significant changes are needed in the funding system. The expected quality of care will not be achieved otherwise. It is incumbent upon providers to communicate-continuously, consistently, and convincingly-with their state and federal elected officials regarding the urgent need for change and the specifics, as suggested above (and summarized in “System Function”) of a reasonable financing system.

Steven C. Wolf is President of Eldercare, Inc., Belleville, Illinois. For further information, phone (618) 234-2273. To send your comments to the author and editors, e-mail

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