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Financing Health Care for an Aging Population

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John F. Derr, R.Ph., Executive Vice President, American Health Care Association

By 2015, the Baby Boom population will reach 77 million. As a group, this population will live longer than preceding generations, thanks to medical advances. So it's crucial to consider how we will care for these older adults—and how we will pay for that care.

Right Place, Right Time
Elder care is often discussed in the same breath as long-term care. But in reality, older adults move in and out of various care settings as their bodies become frail; rarely is aging a one-way street to the nursing home.

Previous generations of elders were placed into homes when they could no longer care for themselves. Today, only those who need high-level care around the clock—and don't have family members to care for them—are likely to be placed in skilled nursing facilities.

Thus, it's essential to build a health system that provides older adults with high-quality care at the right place and time, depending on their needs. The spectrum of care settings could include independent care, home care, day care, assisted living, skilled nursing facilities, hospitals, or hospices. New information technologies, such as electronic health records and telemedicine, can help to compensate for a shrinking health care workforce relative to the patient population. Such tools also can help patients communicate with their providers and manage their own conditions.

A Broken Financing System
In 1998 and 1999, Medicare implemented prospective payment systems for home health care and skilled nursing services. Although these new systems apply only to Medicare-covered post-acute care, they dramatically changed the landscape of long-term care financing by restricting and redistributing the flow of payments to and among providers. Since then, the financing system has been in turmoil, with federal and state legislative and regulating bodies hunting for solutions to a system that is fundamentally flawed.

In focus group studies, elderly adults say that they consider health care an entitlement. And yet, although Medicare and Medicaid already fund care at levels that federal and state governments cannot afford, the quality of care and quality of life provided by these programs are not up to the level that Baby Boomers will most certainly demand—or the programs could provide if they were funded appropriately.

Individual long-term care insurance could be used to ensure a level of care higher than that expected from public programs, but these policies have not been popular. Many insurance companies have dropped long-term care plans, or offer plans that are not much more attractive to individuals than Medicaid. For long-term care insurance to work, adults need to purchase it in their 30s, not when they are approaching or in retirement. But given that younger adults are not likely to think that many years down the road—and often have many competing financial pressures—this is unlikely. To ensure viability of a program, insurance companies require large numbers of policyholders.

A Patient-Driven System of Elder Care
So how can we finance health care for the growing population of elders? We should begin by reforming our incident-based system of care. Health care today is reactive: if we get sick, we make an appointment to see a physician; if we become seriously ill or injured, we go to an emergency department or clinic.

Patients need to take on greater responsibility for their own care. Under a "patient-driven" system, providers would support patients in their preventive and health maintenance efforts through a dynamic system of wellness care. As an example, consider the national epidemic of obesity, which often leads to diabetes, a disease that can have serious and costly long-term side effects. As diabetes progresses and the body fights this debilitating disease, more care becomes necessary, including hospitalization and pharmaceuticals. If more Americans were able to maintain healthy diets and exercise, the health care system would be more efficient and cost less.

Only when individuals take responsibility for their own care will the U.S. health system become financially viable and be able to provide care at the right place and time for elderly patients. Such a system would depend on interoperable health information technologies and personal health records. Today's technology would allow individuals to track their health status; when a trend is in the wrong direction, they could work with their providers to take action. Most people watch their bank accounts to ensure that they do not overdraw their funds. Why can't they do the same for their health? This would require the health care system to provide input and share information between health care settings—an objective of the national program to establish electronic health records.

The barriers to achieving a patient-drive elder care system include: a lack of financial incentives to make the needed capital investments, outdated state and federal regulations, surveyor state operations manuals that mandate paper clinical records and other cumbersome requirements, continuous threats of Medicare and Medicaid reimbursement cuts, and short-term fixes that do not take into account long-term objectives. Add to these issues the silos that exist in American health care, and you have the proverbial situation that an old Pogo comic illustrated: when a solution could not be found to an adverse situation, a character exclaimed, "We have met the enemy, and he is us."

For an example of the challenges to be overcome, consider skilled nursing home reimbursement. On average, payments in skilled nursing home facilities are reimbursed 65 percent by Medicaid and 17 percent by Medicare—totaling 82 percent of the costs of care. Since the implementation of the prospective payment system in 1999, there has been a continuous stream of cuts both to reimbursement and treatments covered. Add to these cuts the high cost of liability insurance and increasing costs of quality staff and you have a broken system.

One proposed solution, pay-for-performance programs, would tie higher reimbursement to quality of care—thus reducing funds to lower-performing facilities. But these facilities most need investment and incentives to improve resident care and quality of life. What's more, current performance measures provide only a "snapshot" of care. Such point-in-time measures cannot gauge how well providers manage the multiple chronic conditions common among elderly patients.

What Can Be Done
To build a viable elder health care system, we need to do the following:

  • Provide five years of stable reimbursement for elder care so that professionals, legislators, and regulators can work together to focus on financial and intellectual strategies.
  • Turn the system for evaluating nursing homes from one based on penalties to one based on partnership, building on the positive results from work done by the Centers for Medicare and Medicaid Services' quality improvement organizations.
  • Provide financial incentives to upgrade elder care facilities and invest in health information technology.
  • Establish financial models for reimbursement based on evidence-based clinical research.
  • Provide government and private financial programs that enable the consumer to obtain the care they expect, and possibly deserve, based on individual responsibility of their own wellness.
  • Curb unnecessary lawsuits, which siphon funds from direct care.

If we take these steps, we can create a health system in which older patients take responsibility for their own health and reap the benefits of high-quality care.

John F. Derr is vice president for special programs at the American Health Care Association, a Washington, D.C.–based nonprofit federation of affiliated state health organizations representing a total of more than 10,000 nonprofit and for-profit assisted living, nursing facility, developmentally disabled, and subacute care providers.

The views presented in this commentary are those of the author and should not be attributed to The Commonwealth Fund or its directors, officers, or staff.

Publication Details



J. Derr, Financing Health Care for an Aging Population, The Commonwealth Fund, December 2005