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Welfare programs for nursing home care are expanded.

In 1959, Congress attempted to fill many gaps in health care coverage by amending the Old Age Assistance (“OAA”) program. The amendment sought to increase medical assistance for welfare recipients through federal and state matching funds. In addition, Congress added a proposal to create the Medical Assistance for the Aged (“MAA”) program which would make health care available to people age sixty-five and older with low or moderate incomes. The MAA program also required state matching funds. By 1960, both proposals became law.

An extremely important change was made in public assistance by what is known as the Kerr-Mills bill. A new section was added to the old-age assistance title of the Social Security Act which provided federal matching of the cost of medical care for persons over 65 years of age who were not sufficiently needy to qualify for cash assistance to cover their ordinary expenses, but who were unable to pay their medical expenses. The percentage of the total cost met by the federal grant ranges from 50 to 80%, depending upon the per capita income of a state. The federal matching of cost of medical care provided for recipients of cash old-age assistance was correspondingly liberalized. (Altmeyer, 1963)

Nursing homes were so entrenched in the welfare system by 1960 that the surveys mandated by the licensure requirements of the Social Security Act were done by the state welfare departments, rather than the health care departments.

Interest was growing in creating a national health insurance program to help Social Security beneficiaries pay their medical costs because medical costs were increasing far faster than other costs. Retired people were particularly at risk because many weren’t covered under the employer health insurance plans which had become more widely available since the debate on national health insurance had begun in the 1940s. President John F. Kennedy strongly supported legislation to create such a program, but the debate was highly charged. (Kennedy’s interest in the subject apparently grew after his father had a stroke which resulted in enormous medical bills which Kennedy realized most seniors would have been unable to pay.) The concept of national health insurance was opposed by the insurance industry, the American Medical Association, most members of the Republican party, and some members of the Democratic party. As a compromise, opponents agreed to support a program to pay for more of the medical costs for the indigent elderly, and in 1960 the medical assistance component of the OAA program (the “vendor payment” program) was replaced with a new program called Medical Assistance for the Aged (MAA), or “Kerr-Mills”

Kerr-Mills provided that the federal government would share welfare costs with the states by paying 50%-85% of the cost of the program, with the higher percentage payments going to states with the lowest average income. The Kerr-Mills program established an additional category of welfare for aged people who were not on public assistance, but who could not pay for needed medical services, who were called “medically needy”. These programs benefited thousands of older people who were not technically “poor” but whose incomes were inadequate to pay for expensive medical costs like nursing home care. The program also helped nursing home operators, since they now had a source of payment for a whole new group of people who otherwise would not have been able to pay for their care.

Government payments escalate.

Program costs had continued to escalate, and payments for OAA exploded from $36 million in 1950 to $280 million in 1960, a 680% increase. The new Kerr-Mills program didn’t rein in any of the costs, it created new ones. Along with adding new classes of beneficiaries, the Kerr-Mills program had eliminated the only control on spending that existed up to that time — the cap on payments set by OAA. From this point forward, states could set payments to nursing home providers as high as they wished, and the federal government, which had no control over rates, was mandated to pay its part of the cost.

Costs of Kerr-Mills increased from $449 million in 1960 to $2.3 billion by 1965, and nursing home costs comprised one-third of that total. This didn’t even represent the cost of providing these services all across the country, since many states didn’t participate in the new program, and 62% of this spending was concentrated in only five states. These states, New York, California, Massachusetts, Minnesota, and Pennsylvania, experienced a glut of nursing home bed development, as speculators swooped in to benefit from a “guaranteed” return.

More money is routed into a home and community-based services.

In 1956, an amendment to SSA authorized federal matching for state funds devoted to providing social services, and in 1962 it was expanded to encourage the provision of social services programs for the elderly. These funds were used to provide services that would allow low-income elderly people to remain in their home. Most states used the money to provide homemaking and other domestic services to older adults still living at home.

In 1961, Congress approved a new medical facilities construction bill, the Community Health Services and Facilities Act. The bill increased federal grants to states for nursing homes, general public health services, hospital planning, and outpatient services for the aged and chronically ill by $40 million over five years.

Demand for nursing home beds increases.

Even with all the new construction, there seemed to be an unquenchable shortage of beds. No matter how many beds were built, there always seemed to be people available to fill them up. Some may have been transferred from the facilities for the mentally ill, but that couldn’t explain all the new residents. It may have been caused by the “woodwork” effect — lots of people who were getting along one way or another without government assistance kept coming out of the woodwork once there were services available that the government would pay for.

Not all of the explosion in nursing home development was related to the availability of payments for welfare recipients. The number of people receiving Social Security increased throughout the 1950s and 1960s as new groups of employees were added to the program, and in 1961 when the retirement age was lowered from 65 to 62 and benefits to aged widows were increased. That enlarged the pool of people who had the financial wherewithal to pay privately for at least some part of their care needs.

Built in 1851 as a private home. Converted to Presbyterian Home of Washington DC in 1917. Converted to Stoddard Baptist Home in 1961. Became historic structure and residents moved to a new facility in 1981. Library of Congress: Historic American Buildings Survey (HABS)

Nursing home quality concerns escalate.

Questions about nursing home quality continued to dominate. By 1960 a U.S. Senate Special Committee on Aging report said that 44% of nursing home beds failed to meet Hill-Burton fire and health standards. This should not have been surprising because few had been held to those standards (or any standards!) when they were built.

One reason for concerns about quality was due to fatal nursing home fires, which were becoming all too common. Some of the largest and most publicized included:

Major Multi-Fatality Nursing Home Fires

Major Multi-Fatality Nursing Home Fires
Date Place
20 October 31, 1952 Hillsboro, MO
33 March 29, 1953 Largo, FL
21 January 30, 1957 Hogham, WA
72 February 17, 1957 Warrenton, MO
63 November 23, 1963 Fitchville, OH
20 December 18, 1964 Fountaintown, IN
31 January 9, 1970 Marietta, OH
23 January 30, 1976 Chicago, IL

The Senate created the Special Committee on Aging in 1961, chaired by Senator Frank Moss, and they began to hold hearings on nursing home problems. The Moss Committee hearings in 1965 documented a huge lack of consistency in state nursing home standards and enforcement efforts, but they expressed caution about increasing enforcement because that meant closing facilities, which were already in short supply. They were concerned that there would be no place to put the dispossessed patients.

Medicare is created.

Although President Kennedy had not been able to get majority support for a national health insurance program while he was alive after he was assassinated the programs he had been espousing took on new life. Lyndon Johnson ran for President in 1964 promising to implement Kennedy’s plans, and won by a landslide, convincing many opponents that Medicare had overwhelming public support.

There was still a lot of debate and intense opposition from the American Medical Association (AMA). Some opponents were concerned that covering hospital costs would only take care of about 25% of the medical costs of the elderly, and others were concerned about providing more coverage for the poor elderly. Another concern was the need to get the support of Ways and Means Chairman Wilbur Mills, who had co-sponsored the Kerr-Mills program for the poorest elderly, and the AMA, which had floated and a voluntary program called “Eldercare” as an alternative to Medicare.

To counter the opposition in order to get the bill passed, all these concepts were incorporated into the legislation, and the 1965 amendments to the Social Security Act established the Medicare and Medicaid programs. Medicare Part A covered hospital costs, Part B was a voluntary program partially financed by premiums which covered physician and other out-of-hospital costs, and Kerr-Mills was converted to a program called ‘Medicaid’ to cover the indigent elderly.

The Older Americans Act is enacted.

Another event that occurred in 1965 was the passage of the Older Americans Act. This Act created the Administration on Aging; authorized grants to states for aging-related community planning, services programs, research, demonstration, and training projects; and called for the development of State Units on Aging. This created what is now called the “Aging Network”, a web of federal, state, and local agencies linked together to focus on social services and other programs primarily targeted to older adults living in their homes. The mission of the Aging Network was expanded in numerous ways in subsequent years, to include advocacy, meal programs, and a number of other services. Because of a lack of funding, many of the services developed long waiting lists, which limited the benefits to a relatively small proportion of the poorest elderly. Although the program had the potential to save the government money by providing more supportive services to people who wanted to remain in the community as a substitute for some of the nursing home costs, it never had the visibility or legislative urgency of Medicare and Medicaid.

Medicaid is created as an afterthought.

Unlike Medicare, the Medicaid program was almost an afterthought. There had been no national debate about what to include or how to design Medicaid as had happened with Medicare. Medicaid was added to the Medicare legislation late in the process, partly as a compromise for those who wanted to add assistance for low-income elderly to Medicare. Medicaid was created from the Kerr-Mills program, and it kept many of the aspects of Kerr-Mills, but added new categories of eligible beneficiaries, like the blind, the disabled, and families with children. Because Medicaid was to be a state-run program and no one had thought through what the federal government wanted to accomplish, Medicaid was just turned over to the states to develop and administer as they saw fit, and the states proceeded to create 50+ varieties of Medicaid.

Medicare coverage for nursing homes is limited.

There had been a huge debate about what costs should be covered by Medicare. Nursing home costs were deliberately carved out of Medicare because of a fear that nursing home care would be a bottomless pit that would financially devastate the program.

“I think that has other implications because it would be comparatively simple administratively to handle the problem of the institutional case because if you attempt to handle on an insurance basis the problem of the chronic illness, the long-time illness cared for in the home and cover the cost of professional services and the other costs, such as medicine, a great deal of difficulty will result. The problem of not padding the costs, or extending the period of illness at the desire of the patient or at the desire of the physician, which in some cases might occur, the problem of supervision, of keeping the cost down, or of being compelled to set arbitrarily the number of visits that would be paid for over a given period, which is done in many of these schemes, would present very great difficulties. I think it would be very difficult to carry out the plan of covering the catastrophic illness in the home whereas I think it would be quite simple to cover the high-cost illness in the hospital.” (Dr. Davis, Unpublished CES Reports, 1935)

The 1965 Advisory Council said in their report “Since the proposed program is designed primarily to support efforts to cure and rehabilitate, and since ‘nursing home’ care, in many cases, is oriented not to curing or rehabilitating the patient but to giving him custodial care, the Council does not propose the coverage of care in nursing homes generally.” (Advisory Council, 1965)

The Department of Health, Education, and Welfare (HEW), under the leadership of Anthony Celebrezze, complied with that recommendation and had written the bill to ensure that nursing home coverage would be limited. Department officials and legislators were worried about nursing home costs, but they were also feared ballooning hospital costs if demand exploded when the government started paying for hospital care. As a compromise, 60 days of “extended care” was included under Medicare, but only if that care would be a substitute for a more expensive hospital stay.

The bill said that Medicare would provide funding for beneficiaries who needed post-hospital convalescence in what was to be called an “extended care facility” (ECF). The ECF terminology was created instead of using any reference to “nursing homes” to make it clear that these stays were not regular nursing home stays and that they would not be provided in regular nursing homes. Originally, only hospital-based facilities were to be certified as ECFs, but a later decision was made to allow free-standing nursing homes to apply for ECF status. The standards for ECFs were set high, with an expectation that few nursing homes would be able to meet them, to put a cap on expenditures. The program also dictated that ECF coverage would only apply if there had been a previous 3-day hospital stay. This provision was intended to ensure that the ECF stay was really a substitute for a hospital stay by limiting care to those who had already been in the hospital for some acute episode.

While the bill’s authors intended to exclude nursing home coverage from Medicare, the general public assumed that long-term care costs would be paid for by Medicare, since much of the promotional material they were hearing said that Medicare would help the elderly “avoid dependence”. Discussions in the U.S. Senate underscored the fact that legislators knew that there was a discrepancy between the public expectation and the bill that was being voted on. During 1965 Senate Finance Committee hearings, Chairman Russell Long asked HEW Chairman Celebrezze, “Why do you leave out the real catastrophes, the catastrophic illnesses?” Celebrezze replied that it was “not intended for those that are going to stay in institutions year in and year out.” Senator Long responded, “Almost everybody I know of who comes in and says we ought to have medicare picks out the very kind of cases that you and I are talking about where a person is sick for a lot longer than 60 days and needs a lot more hospitalization.” Senator Allen Ellender stated on the Senate floor that “many sons and daughters whose mothers and fathers are growing old are of the belief that under the pending bill they will be able to get the Government to take care of their older parents, in the event they become ill for long periods of time” (Twight, 1997).

In spite of the debates and discrepancies, the legislation was signed into law with only limited coverage for nursing home care. The only real compromise was to increase the limit from 60 to 100 days. The final “solution” was to provide unlimited coverage for nursing home services to the poorest of the elderly under the Medicaid program.

Medicaid provides coverage for nursing home care.

The question about how long-term care services would be covered by the federal government was answered by requiring the states to provide both medical home health and nursing home services to their poor elderly in order to receive a federal match for the costs of their Medicaid program. States also could optionally include people who did not qualify as “poor” based on their income or assets if they could not afford to pay for the medical care they needed (the medically-needy), so long as the recipients “spent down” their assets to pay for as much as they could before receiving Medicaid payments.

Medicare costs quickly exceed projections.

To help appease the AMA, Medicare reimbursement to providers would not be based on fixed “rate schedules”. Instead, reimbursement for physicians and other providers would be based on their “reasonable costs”. This was intended to provide assurance that the providers would not lose money to encourage them to support and participate in the program, but it also meant there was no cap on program costs, nor any incentive for providers to control the amount of money they were spending.

Nursing homes were anxious to tap into this new Medicare program, and about 6,000 nursing homes applied for the ECF program when they were able to do so, but only 740 could meet the tough standards. By that time, it seemed politically inadvisable to leave so many homes out of the program, so a decision was made to allow in the facilities that failed to meet the standards, but which were in “substantial compliance”, and 3,000 additional homes were accepted into the program on that basis. “Substantial compliance” just meant that they intended to fix anything that didn’t meet the standards, but many of them never got around to doing that, and once they were in the program they weren’t decertified.

Nothing about the ECF program went as projected. Medicare ECF costs in the first year of the program had been estimated at $25-$50 million, but they ended up being $275 million. This huge overage came about for several reasons:

  • There were many more facilities in the program than had been budgeted for because of the admission of so many “substantially compliant” ECFs.
  • The daily cost ended up being 50% higher than was expected, because the program reimbursed operators for their cost, using “cost-based reimbursement”, without knowing ahead of time what those costs were or putting any caps on those costs.
  • The 3-day hospital stay requirement did not end up reducing hospital costs or limiting the number of nursing home admissions. In fact, the 3-day hospital stay requirement may have actually increased costs when hospital discharges were postponed long enough to meet that requirement.

Medicaid costs quickly exceed expectations.

Although no one had really thought through what the Medicaid program would cost, some features of the program guaranteed it would much more expensive than anyone had anticipated:

  1. Medicaid coverage of nursing home services created a perverse problem when Medicaid covered nursing home care but only provided limited coverage for home care. If someone needed help and was unable or unwilling to pay for it themselves, they could move to a nursing home to receive that assistance and have the cost covered by Medicaid. Once in a nursing home, the high nursing home bills allowed people to qualify for Medicaid at higher income levels because of the “medically needy” provisions, greatly increasing the number of people on Medicaid. At the same time, the program cost per beneficiary increased because Medicaid was now paying for housing, food, housekeeping, and laundry, services which would not have been covered for in-home services.
  2. The option of a federal match provided a huge incentive for states to try to shift other obligations into the Medicaid system so that the federal government would pick up part of those costs, as well. The states could, and did, move people from the community, where the state and local government covered 100% of the cost, to nursing homes, where the federal government would pick up half of the cost. This also meant that the states had an opportunity to greatly expand the services they provided while paying little or none of the additional cost themselves.
  3. States could set rates wherever they wanted, with no caps or ceilings, but they would never have to pay more than 50% of the cost. That made it easier to increase rates since they only had to pay part of the increase themselves. If they combined this with the transfers described above, they could actually increase the rates paid to providers while reducing the cost to the state!
  4. Fiscal control of the system at the federal level was virtually impossible. All of the data was maintained by the states in over 50 different, disconnected systems. The federal government found it difficult to identify costs or utilization statistics even for services that had already been rendered, let alone derive enough information to make accurate projections for the future.

The cost of Medicaid quickly overran all initial projections. As Ways and Means Chairman Wilber Mills remembers it, “We were told by Bob [Meyers], the actuary, that the cost of Medicaid over Kerr-Mills in the first year would be $250 million, nationwide. It was $250 million in New York State alone…They had 41 percent of the people in the state of New York eligible for Medicaid, the legislature did after we passed it. And of course, they’d upped the numbers and that upped the cost over and above what Bob Meyers ever anticipated.” (Social Security Oral Histories)

Nursing Home Supply, Expenditures, and Utilization, Mid-Twentieth Century

The data in the following table comes from a variety of sources, and it’s impossible to tell if all of them were referring to exactly the same facilities and residents, so it is imprecise. However, it probably is good enough to create a very general picture of nursing home utilization and expenditures in the mid-twentieth century. The explosion in utilization and costs that took place after FHA financial assistance for nursing home construction was made available in 1959 and again after Medicare and Medicaid were enacted in 1965 is obvious. Also note that the percentage of the cost borne by the federal government increased far more than that borne by state and local government. (IOM, NCHS, CMS)

Size of Total and Age 65+ Population 1950-1970
U.S. Population 1950 1960 1970
Total population 151,000,000 179,000,000 203,000,000
Population age 65+ 12,300,000 16,500,000 20,000,000
Age 65+ / total population 8.1% 9.2% 9.8%
Nursing Home Supply and Utilization in 1954, 1963, and 1969
Nursing Home Supply and Utilization 1954 1963 1969
Number of nursing homes 9,000 13,100 15,300
Number of beds 260,000 507,500 879,000
Number of residents 260,000 470,000 793,000
Nursing home residents / 65+ population 2.1% 2.8% 3.9%
National Nursing Home Expenditures in 1950, 1963, and 1969
National Nursing Home Expenditures 1950 1963 1969
National spending on nursing homes (millions) $187 $1,055 $3,567
Expenditures per resident $700 $1,800 $5,300
Federal/State/Individual Share of Expenditures in 1950, 1963, and 1969
Federal/State/Individual Share of Expenditures 1950 1963 1969
Federal direct payments for care 0% 18% 24%
State/local direct payments for care 10% 13% 14%
Non-government payments for care
(includes government payments to individuals)
90% 69% 62%

Moss Amendments strengthen fire and nursing standards.

In 1967, the “Moss Amendments” were passed to authorize HEW to standardize the regulations for the Medicare and Medicaid programs, and to withhold funding from nursing homes that did not meet those standards. Regulations were added requiring nursing homes to meet the life safety code of the National Fire Protection Association, and requiring skilled nursing facilities to have at least one full-time Registered Nurse (RN) on staff. For the first time, nursing homes were compelled by federal law to disclose their ownership and all financial interests, to make it easier to identify fraud and abuse.

Intermediate Care Facilities create a catch-all for non-compliant homes.

The 1967 amendments also created a new category of nursing home, called Intermediate Care Facilities (ICF) for facilities that cared for residents that did not need 24-hour-a-day nursing services, but who needed custodial care. The definition of an ICF was not clear, and states began using it as a catch-all for any nursing home unable to meet other standards, in order to get a federal match on their expenditures. HEW tried to create standards, but finally withdrew their proposed ICF regulations when the states protested, and the ICF category remained in limbo until 1971, when ICF standards were finally agreed on and included in Medicaid.

Hundreds of nursing homes close, but quality remains a concern.

In 1966, the Joint Commission on Health Care Organizations (JCAHO), an organization long known for accrediting hospitals, created its first accreditation program for nursing homes.The Moss Committee was back in business. They held 30 hearings from 1969 to 1970 on nursing home issues, and accumulated thousands of pages of testimony.

As standards were increased and Medicare funding was cut, older homes continued to close. A report by the National Center for Health Statistics determined that 1,445 facilities closed just between 1969 and 1971.

Medicare cuts nursing home coverage drastically.

By 1968, ECF costs were up to $500 million, and HEW decided drastic action was required to scale the program back. They distributed “Intermediary Letter 371,” which listed a number of “required” services that had never before been required and warned the insurance companies that administered the program (the intermediaries) that they should err on the side of denying, rather than approving, Medicare claims. Since Medicare claims are not reviewed until some time after the services have been delivered, thousands of elderly people and their families suddenly found out that Medicare was not going to pay for services they had already received, and which they had believed Medicare would pay. Nursing homes had to issue bills to the families asking for payment long after the fact, and thousands of residents and families had to scramble to find the money to pay for it. Estates of deceased residents had liens or garnishments placed on them, and some residents were discharged for nonpayment. Many never did pay, and the nursing homes ended up with uncollectible accounts that had to be written off. To illustrate the drastic change that took place, Medicare denial rates shot up more than 600% between early 1968 and early 1970.

Stocks of the Fevered Fifty publicly traded nursing home companies soar, then crash.

In spite of the looming problems with Medicare reimbursement, publicly traded nursing home chains became one of the hottest things on Wall Street. Everyone viewed Medicare and Medicaid as a risk-free source of revenue that made this a business where no one could lose money. In 1966 there were only a few publicly traded nursing home chains, by 1969 there were 58, and by 1970 there were 90. The best known were called the “Fevered Fifty”, and they were promising investors returns of 20-25% a year. In many cases, they went public before they had even completed construction of their nursing homes, with prices at a huge premium to the rest of the market. The stock of the “Fevered Fifty” exploded in 1969 and 1970, then the bottom fell out by 1971, as reality set in.

In part, the precipitous fall in the stock price was due to be poor management and unrealistic expectations, but there were also some highly visible instances of fraud. The most notorious one was Four Seasons Nursing Centers. Four Seasons came public at $11, shot up to $181.50, then dropped to $.06 a share when the SEC suspended trading after indicating the company president, partners in their accounting firm (Arthur Andersen!), and two officers of a brokerage firm for securities violations. Four Seasons started out as a construction company, but investors didn’t seem to care that the owners had no medical background as they pumped the stock higher before the fraud came to light.

Four Seasons entered bankruptcy and was reorganized as ANTA. ANTA’s subsidiary, Four Seasons Nursing Centers, was later acquired by Manor Care, a much healthier publicly traded nursing home chain that ultimately merged with Health Care Retirement to form HCR Manor Care.

Written By

Jeff Hoyt

Editor in Chief

Since graduating from Harvard with an honors degree in Statistics, Jeff has been creating content in print, online, and on television. Much of his work has been dedicated to informing seniors on how to live better lives. As Editor-in-Chief of the personal… Learn More About Jeff Hoyt

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