U.S. and Global Approaches to Financing Long-Term Care: Understanding the Patchwork

Abstract

• Issue: The high cost of long-term care puts financial pressure on families and worsens inequities in many developed countries. But compared with the United States, many other high-income nations have adopted more comprehensive approaches to financing long-term care services.
• Goal: To understand how different countries and U.S. states finance long-term care.
• Methods: Analysis of long-term care cost data in the U.S. and spending data from the Organisation for Economic Co-operation and Development for 12 high-income countries.
• Key Findings and Conclusion: U.S. spending on long-term care is proportionally the lowest among high-income countries, and there is no single approach to funding this care. In many of these countries, and in certain U.S. states, there is broad eligibility for long-term care benefits or substantial financial assistance, paid mostly through the government or social insurance programs. Common approaches to financing include social insurance, universal comprehensive coverage, residual (or means-tested) systems, and hybrid strategies. Insights from international models and from innovative funding mechanisms being tested by some U.S. states could inform future efforts to reduce the financial burden of long-term care on U.S. families while reducing income- and race-based inequities.

Introduction

Most United States adults age 65 and older will need long-term care toward the end of their lives.¹ Long-term care, provided in the home, community, or in institutional settings like a nursing home, includes medical care as well as personal, nonmedical care for people who are unable to perform activities of daily living, like cooking or bathing. Some services also may support social needs for those unable to perform what are known as instrumental activities of daily living, such as shopping or medication management.

In 2018, more than 5 million people in the United States used home health care, including adult day care or home health agency services, and nearly 4 million people resided in nursing homes or residential care communities.² Despite the widespread need for long-term care, the U.S. has no national program to cover the costs of long-term care. While certain states have implemented their own programs, the resulting patchwork of funding has left many Americans with no sustainable way to pay for the services they require. Other developed countries have comprehensive, national long-term care financing systems featuring broad eligibility and high levels of financial support.

In this brief, we analyze data from multiple sources on long-term care costs in the U.S., as well as spending data from the Organisation for Economic Co-operation and Development (OECD), to better understand long-term care financing strategies in 12 high-income countries. In addition to these data, we synthesized initiatives to long-term care funding in these 12 countries. (For details, see “How We Conducted This Study.”)

Since the U.S. does not have a national funding strategy, we also focused on individual state approaches. International and U.S. state approaches may provide insights to policymakers seeking to advance comprehensive long-term care funding.

Long-Term Care in the United States: Who Bears the Costs?

In the U.S., long-term care costs individuals and their families thousands of dollars annually, with nursing home care often costing more than $100,000 a year (Exhibit 1). Given that many who use these services will need it for at least one year, costs can quickly become burdensome.³

Compared with adults without long-term care needs, those requiring long-term care are more likely to accrue credit card debt to cover expenses and take longer to pay off that debt. They are also more likely to rely on social service programs like food stamps, meaning the financial burden of long-term care may fall disproportionally on those with other financial needs.⁴

Older adults who need long-term care are more likely to be Black or Hispanic and female.⁵ At the same time, Black and Hispanic adults are more likely to struggle to afford and finance home care.⁶

Most adults age 65 and older rely on unpaid caregivers, like family members, for long-term care. In the U.S., the role of caregiver is more likely to fall on women, who also spend more on caregiving activities than men.⁷ On average, caregivers spend one-quarter (26%) of their annual income on caregiving activities like food preparation and laundry, as well as medical supplies not covered by insurance. This doesn’t include additional indirect costs such as reduced work productivity, lost wages, and caregivers’ medical expenses stemming from their caregiving activities.⁸

How U.S. Long-Term Care Is Financed

In the United States, long-term care is financed through a mix of public and private funding, including out-of-pocket spending.

In 2020, estimated U.S. spending for long-term care totaled $361.6 billion (Exhibit 2). Medicaid, the state-administered program for people with low income, and other public insurance sources — COVID-19 Pandemic Assistance, the Veterans Health Administration, and the Children’s Health Insurance Program, among others — account for the majority of all long-term care funding ($230 billion). Medicare, the main source of insurance for people age 65 and older as well as younger people with disabilities, does not cover long-term care.

Medicaid pays for more than half of all long-term care in the U.S.⁹ Coverage and eligibility vary by state, however. To qualify for Medicaid coverage in some states, adults with long-term care needs must have monthly incomes below a specified threshold. In other states, if income or assets exceed the threshold, people can “spend down” their income on health care to meet eligibility requirements. To meet federal requirements, each program must cover a certain level of long-term care, specifically nursing home care and some home health services. Programs may choose to cover home and community-based services (HCBS), including support for activities of daily living, among other services.

Spending on optional HCBS varies as well. In 2019, four states spent more than 75 percent of their dedicated Medicaid long-term care dollars on HCBS, while 18 states spent less than half.¹⁰

Medicare’s lack of coverage for long-term care, Medicaid’s eligibility limits, and the limited availability of other forms of public coverage all help explain the financial burden of long-term care on many U.S. families. Nonpublic spending was $131.6 billion in 2020, largely driven by out-of-pocket costs and private long-term care insurance. Other sources of private long-term care financing include philanthropic organizations and foundations or corporations.¹¹

U.S. long-term care spending is comparatively low as a share of total health expenditure (Exhibit 3), though it should be noted that U.S. health expenditure is far higher than any of the listed countries so absolute spending from the U.S. may be higher. In other countries, government and social insurance programs fund this care through recipient contributions as well as taxes — although, similar to the U.S., individuals and families also rely on unpaid, informal care and have higher household expenses.¹²

Approaches to Funding Long-Term Care

Many countries developed long-term care systems decades ago. These systems typically feature broad eligibility for benefits and often high levels of financial support. In the U.S., a number of states have introduced their own long-term care coverage programs, with more states planning to do so in the future.

Existing financing schemes for long-term care can be broken down into four commonly used schemes¹³:

1. Social insurance, which provides extensive coverage for all contributing workers. Such programs are funded through payroll taxes and may be paid by employees, employers, or both. While the U.S. Medicare program does not cover long-term care, it is an example of social insurance.
2. Universal, comprehensive coverage through a single-payer program administered by a government entity. These programs are funded through general revenues and typically include cost sharing.
3. Residual, or means-tested, systems, which do not provide universal benefits but serve as a social safety net for those who cannot afford health care or long-term care. To qualify within a residual system, applicants must meet eligibility requirements and pass a means test, whether focused on income, assets, or both. These programs are funded through general revenues. In the U.S., Medicaid is an example of a residual system.
4. Hybrid approaches that combine two or more of the previously mentioned approaches.

International Approaches

While approaches to long-term care vary markedly from country to country (Exhibit 4), they generally work in conjunction with centralized health systems. Several nations have patchwork systems like the U.S. does, with care provision and financing varying by region, state, or even locality. The U.S. patchwork of coverage is much more limited, however, with some states covering only services delivered through their Medicaid program, which enrolls only people with low income.

Benefits are financed through a variety of means — general revenues, payroll taxes, premiums, or copayments, for example. The level of benefits also varies. Some countries, such as France, Germany, and the Netherlands, provide flexible cash and service benefits; others, like Japan and Norway, have much more rigid benefits that can only be used for certain services. Flexible cash benefits are usually reimbursements filed through long-term care plans but in some cases are provided as checks, allowing recipients to use benefits as they choose. These benefits can be used for certified caregivers or, in certain cases, for reimbursing family members who provide care.

Service benefits are another form of flexible benefit. These provide a budget for long-term care users to allocate through a preapproved provider for services like meals or transportation.

Despite the more generous levels of coverage and funding for long-term care in many European countries, there are still serious inequities. Approximately half of households cannot afford formal long-term care, with the greatest difficulties experienced by households led by people with low income and lower levels of education, migrants, and ethnic minority women.

Responsibility for care often falls on family members, mainly women, who often must put their careers, social relationships, and well-being on hold.¹⁴ In many cases, the provision of care is outsourced to domestic workers or forgone entirely.¹⁵

Individual U.S. State Approaches

Long-term care coverage in the United States is a patchwork of programs that often falls well short of meeting people’s needs and budgets. While Medicaid is the largest payer, some states have additional programs in place that vary by type of coverage, level of financial assistance, and eligibility (Exhibit 5). For example, instead of directly covering the costs of services, some states offer cash grants for individuals or their caregivers.

Some states have means-tested, residual programs that offer coverage for people who do not qualify for Medicaid but have significant health or financial needs. Other programs are more groundbreaking, like Washington State’s, which features comprehensive benefits, widespread eligibility, and an innovative funding mechanism.

California, Michigan, Illinois, New York, Minnesota, and Rhode Island have funded studies to assess the scale of financial need among their residents and the feasibility of implementing long-term care financing policies.¹⁶ Minnesota’s study resulted in a proposed enhanced home care benefit that would require all Medicare Advantage and Medigap plans to cover in-home nonmedical supports, which are not covered by traditional Medicare. The Michigan study proposed a social insurance program. Despite state-level interest in the feasibility of long-term care payment reform, none of these states have enacted new policies.

State Efforts to Support Older Adults at Home

Beyond the financial burden of medical care and assistance with daily activities, many older adults who choose to age at home need assistance with modifying their homes or affording rent. Arizona and Maryland offer home modification assistance. Arizona’s Family Caregiver Reimbursement Program, which is state-funded, reimburses caregivers for the cost of home modifications. In Maryland’s membership-based Community for Life program, individuals pay a set fee to receive home modification and transportation services.¹⁷

Minnesota and Massachusetts offer state-funded supportive housing programs to address the housing needs of adults who are at risk for institutionalization or homelessness. Minnesota’s Housing Support program offers a specific dollar amount (currently $954 per month) to cover room and board for qualifying seniors. Massachusetts’s Supportive Senior Housing Initiative offers a limited number of age-restricted housing units, as well as supportive services to seniors living in certain counties.¹⁸

The Biden administration and Congress have made improved home and community-based services a priority, with Congress proposing a permanent increase in the federal matching rate for Medicaid HCBS coverage in 2021. In some ways, this is the most significant national effort to address long-term care financing since 2012, when Congress commissioned a study to explore how a comprehensive financing system could be implemented.¹⁹

Although the federal government could encourage states to provide increased financial assistance for long-term care, continuing to rely on state-level action could exacerbate the variation in coverage among states. Conversely, it may allow financial assistance to be tailored to the needs of residents and state budgets.

Conclusion

Many high-income countries around the world, as well as several U.S. states, are innovating to ensure their aging populations have access to affordable and comprehensive long-term care. The U.S. government provides less support than other high-income countries, but some states have taken the initiative to make long-term care more affordable to their aging populations.

Within the U.S., the lack of a unified funding mechanism places the heavy financial burden of care on individuals and their caregivers — a burden that weighs especially heavy on people of color and low-income adults. Yet even in countries with more robust systems, many people rely on family members to provide and pay for some care.

Despite these shortcomings, approaches from within the United States and abroad offer insights into how health care systems and payment models can be leveraged or expanded to cover long-term care needs.