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In Brief: Capitated Payment of Medicaid Long-Term Care for Older Americans: An Analysis of Current Methods

Introduction and Background

This In Brief summarizes the findings of the AARP Public Policy Institute issue paper, Capitated Payment of Medicaid Long-Term Care for Older Americans: An Analysis of Current Methods. The number of older Americans, who are at greatest risk of needing long-term care (LTC) services, will increase over the next several decades. Many individuals will clearly need services provided in a nursing home. However, for many, services could be provided effectively in the home or community, which most individuals prefer. Unfortunately, the limitations within the Medicaid program maintain an institutional bias towards providing services in nursing homes.

Without policy changes, the share of state budgets devoted to LTC for older persons—mostly Medicaid funded nursing home care—is expected to increase over the next 20 years from its current level of about 4 percent to about 8 percent. Consequently, state Medicaid programs have shown increasing interest in capitated LTC financing. Under a capitated payment system, a provider is paid a fixed amount per person regardless of the actual number or nature of services provided. If LTC capitation provides an avenue to serve people in preferred, less costly home and community-based (HCB) settings, then it has the potential to expand the range of services, increase consumer satisfaction, and restrain state LTC expenditure growth.

One approach is to capitate LTC on its own, while a second is to capitate an integrated system of acute and long-term care. The few programs that currently capitate LTC—for example, those in Arizona and Texas—aim to facilitate flexibility in the provision of services and decrease reliance on nursing homes while controlling expenditure growth.

Notwithstanding the possible benefits of long-term care capitation, accurately setting the capitation rate is quite challenging. Almost all capitated programs use the enrollment and expenditure experience of a comparable group of non-capitated beneficiaries as the foundation for setting payment rates. A key beneficiary characteristic used for capitated LTC rate setting is whether individuals' health conditions and functional limitations would make them nursing home-eligible. States vary greatly in how they assess the need for nursing home care—some require only functional limitations, others require nursing needs, and others require a combination of both. The level of functional impairment required also varies by state, but a need for assistance in at least two or three activities of daily living is common (e.g., bathing, dressing, and eating).

The states that presently capitate LTC use various blends of the expenditures for nursing home residents and nursing home-eligible beneficiaries living in the community to set the capitation rate. As part of the rate setting process, states also decide which services will be covered, calculate projected expenditures per eligible month, and adjust the cost experience for additional factors, such as inflation, managed care savings, recent changes in the Medicaid program, and beneficiary cost-sharing. In most states, expenditures for people in nursing homes are two to three times the expenditures in waiver programs, creating a wide range in which capitated rates could fall.


States that pursue capitation of LTC must carefully consider several questions. What advantages does capitation offer over established HCB waiver programs? How can states use capitation to extend services to the many older individuals living in the community who could qualify as nursing home eligible without placing greater demands on the state budget too quickly? If states choose to adopt a capitated approach, how will they deal with the substantial state administrative effort that will be required to establish and manage the program and how will they address concerns that capitation might lead to underservice?

The central policy question of whether LTC services should be financed by a capitated payment will need to be answered in part with more practical experience, including more years with a large number of enrollees. However, existing programs, such as the Program of All-Inclusive Care for the Elderly and programs in Arizona, Minnesota, and Texas, which are described in the report, already provide some useful information about the kinds of rates and incentives that certain rate setting approaches yield. These capitated LTC programs deserve close observation.

States with the broader goal of integrating acute care and LTC in a capitated program for persons age 65 and older face significant difficulty because such integration requires Medicare funds to cover the costs of acute care. Since the federal government prohibits the mandatory enrollment of Medicaid beneficiaries in health maintenance organizations for Medicare-covered acute care services, and since beneficiaries eligible for both Medicare and Medicaid appear reluctant to enroll voluntarily in programs, the prospects for the broader goal of capitating LTC with acute care are mixed.

Written by Richard Kronick, Ph.D. and Tony Dreyfus, M.C.P.

Stephanie Bernell, Ph.D., Project Manager, AARP Public Policy Institute
March 2001
©2001 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, Public Affairs, AARP, 601 E Street, NW, Washington, DC 20049

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