A Proposal to Finance Long-Term Care Services through Medicare with an Income Tax Surcharge
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Abstract
We propose a new system of financing long-term care services in the United States. Our plan expands
Medicare to cover comprehensive long-term care services, including home care and custodial nursing
home care. Beneficiaries would share in the cost of services through deductibles and copayments,
but the program would include stop loss coverage and special protections for low-income adults.
By providing long-term care insurance that actually protects the assets of older adults, our proposal
would eliminate the disincentive to save inherent in the means-tested Medicaid system. Our plan
would also remove the bias in the current system for institutional care, enabling more persons
with disabilities to remain at home where most prefer to live. We propose to finance this expansion
of Medicare benefits with a surcharge on federal income taxes. Unlike the regressive payroll tax
that finances Medicare’s hospitalization coverage, the surcharge we propose would not increase
tax burdens for low-income individuals or families. All of the revenue generated by the tax would
be dedicated to a special Medicare trust fund that would finance future long-term care services.
Introduction
The financing of long-term care services for elderly adults is a critical public policy issue.
As baby boomers age, the number of older Americans will soar over the next few decades. Between
2000 and 2040, the population aged 65 and older will almost double, to 77.2 million, while the
population aged 85 and older will more than triple, to 14.3 million (U.S. Census Bureau 2000).
Despite recent improvements in health at older ages (Manton and Gu 2001; Freedman et al. 2004),
many elderly Americans will continue to need assistance with basic personal care. The Congressional
Budget Office (1999, 2004) estimates that the number of Americans aged 65 and older with long-term
care needs will increase from 8.8 million in 2000 to at least 12.1 million in 2040.
The family has traditionally been an important provider of care to the frail elderly. Most older
persons with disabilities live in the community, not in nursing homes (Feder, Komisar, and Niefeld
2000), and receive care from spouses and adult children (Johnson and Wiener 2006). The availability
of informal care is a critical factor in enabling frail elders to live independently in the community
(LoSasso and Johnson 2002). However, it is unlikely that family caregivers alone can meet the expected
rise in long-term care needs. Women are much more likely than men to provide care to their parents
(Mui 1995), but many are being forced to reduce the amount of time they devote to caregiving activities
as more and more women enter the labor force. And declining fertility rates may limit the number
of adult children who will be available to provide care to their parents in the future. As a result,
an increasing number of older adults may rely on paid helpers in the next few decades, either at
home or in institutions, to meet their long-term care needs.
Despite the growing importance of formal long-term care services in the United States, there are
significant problems with the way in which they are now financed. Most nursing home costs are paid
by the public sector today. Although this is clearly a boon for frail elderly Americans, the availability
of public funds for long-term care services discourages individuals from preparing for their own
long-term care needs when they are young and healthy. Medicaid eligibility rules impose a nearly
100 percent tax on income and assets for nursing home residents. This implicit tax may be an important
factor behind the alarmingly low savings rate for middle-class Americans. The current system also
favors institutional care over home- and community-based services, which are not as heavily subsidized
as nursing home services.
Private insurance is available for long-term care expenses, but coverage rates are very low. Adults
may be reluctant to purchase long-term care policies because Medicaid will pay for expenses that
exceed their financial resources. Other problems with the private market for long-term care insurance
include benefits that often turn out to be inadequate to cover future expenses, high load factors,
large year-to-year premium increases and resultant high nonrenewal rates, and serious adverse selection
problems.
To remedy the problems with the current system, we propose expanding Medicare to cover comprehensive
long-term care services, including home care and custodial nursing home care. Beneficiaries would
share in the cost of services through deductibles and copayments, but the program would include
stop loss coverage and special protections for low-income adults. By providing long-term care insurance
that actually protects the assets of older adults, our proposal would eliminate the disincentive
to save inherent in the means-tested Medicaid system. Our plan would also remove the bias in the
current system in favor of institutional care, enabling more persons with disabilities to remain
at home where most prefer to live. We propose to finance this expansion of Medicare benefits with
a surcharge on federal income taxes. Unlike the regressive payroll tax that finances Medicare’s
hospitalization coverage, the surcharge we propose would not increase tax burdens for low-income
individuals or families. All of the revenue generated by the tax would be dedicated to a special
Medicare trust fund that would finance future long-term care services.
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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.
