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Measuring the Costs and Savings of Aging in Place

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Fall 2013   


        Aging in Place: Facilitating Choice and Independence
        Measuring the Costs and Savings of Aging in Place
        Community-Centered Solutions for Aging at Home

Measuring the Costs and Savings of Aging in Place


      • Evidence suggests that programs that support aging in place may yield cost savings for families, government, and health systems.
      • More extensive research is needed to better account for all costs involved, because existing evidence often relies on small-scale case studies.
      • Aging in place has also been shown to have health and emotional benefits over institutional care.

With the United States’ ongoing demographic shift toward an increasingly older population, along with the fact that 89 percent of Americans over age 50 wish to remain in their homes for as long as possible, conversations about the benefits and costs associated with aging in place will become increasingly critical. Recent research on home-based health programs suggests that aging in place can yield potential cost savings at the individual, state, and federal levels. Although the current body of research is limited, these studies demonstrate the benefits of aging in place — benefits that extend beyond cost savings to include social and emotional benefits to both seniors and the broader community.

Individual Cost Savings

A nurse taking a blood pressure reading for an elderly man living in a nursing home.
Nursing home expenditures are more than three times those of noninstitutional long-term care services, and approximately one-fifth of nursing home bills are paid out of pocket.
The choice to either age in place or enter institutional care is a complex and deeply personal decision that hinges on factors such as the amount of health care needed and the availability of family assistance. However, one reason most older adults choose to age in place for as long as they are able is simply because doing so is the most economical option. Some older people — 21 percent of those aged 65 to 74 and 18 percent of those aged 74 to 84 — own their homes outright and thus no longer have mortgage expenses.1 Others are enrolled in the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program, which helps elderly homeowners age in place by allowing them to access the equity of their homes as income.2 (For more information about HECM, see “Aging in Place: Facilitating Choice and Independence”).

Even when seniors are ready to move, selling their homes can be difficult. Their homes tend to be older and are less likely to have been updated, making them less desirable to potential buyers, especially in a slow housing market. A 2008 survey from the American Seniors Housing Association found that nearly a quarter of seniors have not improved their homes in 10 years, and 41 percent say they won’t spend money to attract a buyer.3 These findings are starkly different from the 57 percent of all homeowners who made home improvements in the 3-year period from 2009 to 2011.4

High nursing home costs mean that aging in place could yield significant cost savings for the elderly. From 2004 to 2007, in 2009 dollars, the median monthly payment for noninstitutional long-term care was $928 compared with $5,243 for nursing homes. Expenditures for nursing homes are more than three times those for noninstitutional long-term care services, and these rates are continuing to rise.5 Between 2011 and 2012, the average daily rate for a private room rose 3.8 percent, which exceeded the rate of inflation.6 Approximately one-fifth of nursing home bills are paid either primarily or entirely out of pocket. In 2009, 94 percent of people aged 65 and older paid for health care out of pocket.7 Out-of-pocket spending is much greater for institutional than for noninstitutional services. For example, among those who needed assistance with activities of daily living, out-of-pocket expenses were $554 and $1,065 in 2009 dollars for noninstitutional and institutional services, respectively.8

Potential Cost Savings to Medicaid and Medicare

In addition to saving money for seniors, promoting aging in place may also create systemic cost savings for the Medicare and Medicaid programs. Medicare is a federal health insurance program primarily for people aged 65 and older, whereas Medicaid is a joint federal and state assistance program that helps cover medical costs for some people with limited income and resources.9 Rules and eligibility for these programs vary by state; some individuals are “dual eligible,” meaning they can receive both Medicaid and Medicare coverage.10

Together, Medicaid and Medicare pay for the majority of long-term care. Of the $203 billion spent in 2009 for nursing home, home health care, and other long-term services and supports, 62 percent was paid through Medicaid, 4 percent was paid through Medicare, and 23 percent was paid by individuals out of pocket. The remainder was paid by private insurance.11 Medicare has more restrictive guidelines for home and community-based services (HCBS) than does Medicaid: Medicare’s home health program is designed for acute illnesses and averages approximately 24 days, and the individual must have orders from a physician to qualify. Longer-term HCBS care is covered through Medicaid for those who meet the program’s eligibility requirements.12 Because of rising demand and seniors’ desire to age in place, Medicaid HCBS spending has greatly increased. In 2007, total Medicaid HCBS spending rose to $41.8 billion, a 95 percent increase from 1999 levels.13

States have also been encouraged to expand their HCBS waiver programs. These waiver programs, such as those authorized under section 1915(c) of the Social Security Act, allow states to provide medical and nonmedical services to individuals who are eligible for institutional care.14 The waiver programs must demonstrate cost neutrality, meaning that the state’s average per-person spending on HCBS waiver participants cannot exceed Medicaid’s average per-person spending for the type of institutional care for which they are eligible.15 States have the discretion to set financial eligibility criteria and specify the target group served and geographic coverage.16 States often prefer to provide HCBS services using waiver programs because controlling costs is easier through these programs than with other methods, such as Medicaid’s optional Personal Care Services State Plan benefit, which must be applied uniformly throughout the state and made available to everyone who qualifies.17

The federal government sponsored several demonstrations in the late 1970s and 1980s to evaluate the cost-effectiveness of home-based care compared with nursing home care. These tests were experimental prototypes for the Medicaid HCBS waiver program, but many of the demonstrations found that expanding community-based care did not reduce long-term care expenditures because of what was called the “woodwork effect,” meaning that people who would not have received institutional care would “come out of the woodwork” to apply for community-based care (see “The Woodwork Effect”).18 Although the expansion of home-based care services benefits the public, serving more people can offset any savings achieved through these programs. The existence and impact of the woodwork effect has been a source of debate, however, and it is still being studied.19

A line graph showing the trends in out-of-pocket health care expenditures for seniors from 1977 to 2009.
Source: Federal Interagency Forum on Aging-Related Statistics. 2012. “Older Americans 2012 Key Indicators of Well-Being,” table 33b, 142–3. Note: The 1996 datum for age 85 and over households with incomes below 125% of the federal poverty level is missing.
Despite the woodwork effect, these early demonstrations also found that narrow targeting and emphasizing services provided in alternative facilities, such as community centers and senior centers, can result in budget neutrality.20 More recent studies, beginning in the mid-1990s, offer further support for these administrative cost-control techniques. Kane et al. even suggest that to a certain degree, the woodwork effect is necessary to achieve long-term cost savings. Researchers in Oregon found that 2.6 people needed to be served by HCBS to eliminate one nursing home bed. Therefore, serving more people can result in systematic reform and savings in the number of nursing home beds created and maintained.21 More recent studies confirm this finding and even demonstrate cost savings. These studies, along with HCBS waiver requirements, have led most to accept that per-person costs for HCBS are lower than those for institutional care.

One study that analyzed state-by-state Medicaid long-term care spending from 1995 to 2005 found that expanding HCBS created a short-term spending increase that was followed a few years later by long-term care savings and a reduction in institutional spending. Spending growth was greater for states that offered limited HCBS services than it was for those that already had established noninstitutional programs. For example, in states with established high-expenditure HCBS programs, nursing home spending declined by 15.3 percent and overall long-term care spending declined by 7.9 percent.22 In states that were expanding their HCBS programs, nursing home spending remained fairly stable for three years following the expansion and then declined in each subsequent year.23 These results suggest that expanding HCBS may require an initial increase in spending that will decrease after the HCBS programs become established, potentially creating cost savings.

Kitchener et al. examined 2002 data to compare per-participant expenditure costs for Medicaid HCBS waiver programs with those for institutional care. The researchers found that HCBS waivers produced a national average public expenditure savings of $43,947 per participant for that year.24 In a 2005 survey by the Centers for Medicare and Medicaid Services (CMS), 165,276 nursing home residents indicated that they would like to return to their communities; if they received HCBS waivers to do so, the public could see annual savings of $2.6 billion.25 While it is not feasible for all residents who expressed the desire to return home to do so, the savings would still be significant. However, this study did not attempt to examine whether waiver programs save the state money overall because such savings depend on several factors, including the previously mentioned woodwork effect as well as other research and data issues.

Case Studies

Although the studies described above analyzed systemwide Medicare and Medicaid cost data, other studies have evaluated the cost savings of specific programs. For example, the Arizona Long Term Care System (ALTCS) emphasizes HCBS and provides incentives to avoid institutional placement. This program has decreased the state’s LTC Medicaid expenditures by 16 percent and lowered the growth rate of these expenditures.26 One reason for this program’s success is its high level of coordinated care. Some HCBS programs suffer because Medicaid does not reimburse states for the extra care and time needed to coordinate care, especially the transition from acute to long-term care. For this reason, states such as Arizona have initiated capitated systems for Medicaid payments.27 A capitated system, based on patients and not on services, allows providers (or Program Contractors, as ALTCS calls them) in similar programs to avoid breaking down separate Medicare and Medicaid expenses. Instead, they are paid blended rates each month based on the number of people enrolled in the program.28

The federal government has also experimented with different home-based care programs using capitated payment systems. The Program of All-Inclusive Care for the Elderly (PACE) is a Medicare and Medicaid state option program for those who are eligible for nursing home-level care but can safely reside in the community. The program integrates both acute and long-term care, amounting to a continuum of both medical and social services. In addition to better clinical outcomes through shorter hospital stays, lower mortality rates, and better self-reported health and quality of life, costs for PACE enrollees are estimated to be 16 to 38 percent lower than Medicare fee-for-service costs for the elderly population and 5 to 15 percent lower than costs for comparable Medicaid beneficiaries.29

Despite these favorable outcomes, the PACE program was slow to expand in its early years. Reasons for the slow growth included a lack of funding for nonprofit providers to develop PACE sites, a shortage of for-profit providers, the unwillingness of older adults to leave their primary care provider to enroll in PACE, poor marketing; inadequate state support, and the high cost of participation for middle-income older adults not eligible for Medicaid.30 As the program has expanded to rural areas and become better known, the number of PACE programs has grown, more than doubling between 2007 and 2012. Currently, 29 states offer 88 local PACE programs, which are run by nonprofit or for-profit providers and monitored by CMS and the program’s home state.31 However, many of the issues that caused PACE’s initial slow growth continue to prevent the program from spreading nationwide.32

Using the idea of coordinated care, the Sinclair School of Nursing at the University of Missouri developed its own Aging in Place (AIP) program. AIP employs nurse care coordinators to manage the delivery of both Medicaid HCBS and Medicare home health services. A distinguishing feature of this program is that the same care personnel, including nurses, therapists, and home health aides, deliver both Medicaid and Medicare services. Not only did AIP participants have statistically significant better clinical outcomes than those in nursing homes, but an evaluation also found that total Medicare and Medicaid average costs were $1,784 lower for AIP participants than for nursing home residents. Most of these savings came from reduced Medicaid costs. The evaluation estimates that enrolling only 10 percent of Americans needing long-term care in AIP or a similar program could save nearly $9 billion.33

These studies demonstrate the benefits of coordinated and integrated care in community settings. Although multiple factors explain the successes and cost savings of these programs, service integration is perhaps the most important one. Integration benefits both patients, who can receive uninterrupted Medicare and Medicaid services in their home or community, and providers, who are often paid for their coordination time and, in capitation programs, enjoy a simplified reimbursement process. These models merit further study and evaluation in the continuing discussion of aging in place.

Research Issues

An older woman walking down a sidewalk, aided by the use of a cane and a walking companion.
Ninety percent of aging-in-place adults rely on help from family, friends, and volunteers.
Although the studies discussed in this article provide some evidence of the multiple benefits of aging in place for individuals, families, taxpayers, and state and federal governments, more research is needed. Most of the studies to date have been small and have evaluated specific programs over a short period of time. Other studies have found insufficient evidence to draw conclusions about potential cost savings.34

Costs comparisons of long-term care are challenging for several reasons. Often only Medicaid expenditures are considered without also examining Medicare and private insurance spending. Studies should also include expenditures by other public programs such as Social Security, the Supplemental Nutrition Assistance Program, and others to measure the true effectiveness of aging-in-place initiatives.35 Such efforts could help governments avoid shifting expenditures from one program to another or between state and federal funds.36 However, these data are very difficult to obtain and cross reference. Reporting requirements for various home-based care programs are not uniform, making comparisons across programs and states difficult. Furthermore, researchers often do not have access to consumer information and claims data.37

Researchers must also consider the potentially significant costs of aging in place for individuals and their families.38 About nine-tenths of those aging in place who need long-term care rely on a family member, relative, friend, or volunteer as their primary source of help with daily activities.39 This informal care can be paid or provided in kind and, although estimates vary widely, AARP puts the value of this work at $450 billion in 2009, up from $375 billion in 2007. Informal care can have an enormous effect on cost studies if it is considered,40 but measuring and monetizing these informal contributions is difficult. In addition, personal accounts of caregiving often do not distinguish between familial relationship activities (visiting relatives and supplying food) and more formal care activities (administering medicine or checking blood pressure).41

Beyond Costs

In addition to these research challenges, some researchers and aging-in-place advocates argue that policymakers’ focus on controlling costs is having a detrimental effect on the quality and availability of HCBS care. Harrington et al. argue that the cost containment strategies of some HCBS waivers are doing more harm than good.42 Cost controls, including service limits, geographic limitations, hourly limits, and fixed expenditure ceilings, can lead to elderly people not receiving the services they need and premature or unnecessary institutionalization for those who fall outside the state’s constraints — for example, those living outside of the target area or requiring services that fall above the hourly limits or fixed expenditure ceilings.43 Researchers estimate that more than 15 percent of those living in nursing homes are there inappropriately, and addressing this issue requires considering more than just the cost of care.44

Others argue that those who spend so much time and energy examining how to reduce costs are focusing on the wrong area; instead, they should be emphasizing the emotional, social, and health benefits of HCBS and aging in place.45

Aging in place also helps protect social connections. Social isolation is a major problem among the elderly, and relationships that are found in a community are important to maintain throughout life. Aging in place allows people to better maintain their social relationships. In a recent AARP survey, 41 percent of those who want to remain in their community stated that their primary reason for staying was their friends, followed by family, safety from crime, and a pleasant neighborhood/community.46

In addition to preventing social isolation, allowing older people to stay involved in their communities has been found to have health benefits. Civic engagement and volunteering can reduce mortality; increase physical function, muscular strength, and levels of self-rated health; reduce symptoms of depression and pain; and increase life expectancy. An evaluation of Missouri’s AIP program showed that participants had better outcomes in the areas of cognition, depression, activities of daily living, and incontinence than those in nursing home care. This finding led Marek et al. to suggest that maintaining independence in one’s home contributes to more positive outcomes.47 These improved health outcomes can, in turn, lead to cost savings.48

Because of these emotional, social, and health benefits, LaPlante recommends creating a cost-benefit framework that takes into account the quality of life differences between aging in a nursing home and in the community. This framework would also define independence as more than simply living outside an institution. True independence for the elderly involves control over their own lives and meaningful participation in the community; receiving services at home or in the community can play a large role in gaining this independence.49 A cost-benefit framework would allow more accurate comparisons between institutional care and HCBS. The costs of aging in place will continue to be an issue for years to come. Researchers estimate that expenditures on community long-term care services could surpass nursing home expenditures as soon as 2015 or 2016.50 Costs are always important, especially in tight budget climates, and the potential cost savings from expanding HCBS programs predicted by some studies are promising. However, more research is needed that takes into account all the costs and benefits of aging in place.

Related Information:

The Woodwork Effect

Demonstration Will Evaluate Subsidized Models for Aging in Place

  1. “Free and Clear American Homeowners.” Zillow Real Estate Research Website ( Accessed 31 October 2013.
  2. Consumer Financial  Protection Bureau.  2012. “Reverse Mortgages: Report  to Congress,” 16.
  3. Elinor Ginzler. 2012. “From Home to Hospice: The Range of Housing Alternatives,” in Independent for Life: Homes and Neighborhoods for an Aging America, ed. Henry Cisneros, Margaret  Dyer-Chamberlain, and Jane Hickie, Austin: University of Texas Press, 55.
  4. U.S. Census Bureau. 2011. “How Do We Know: Home Improvements.”
  5. H. Stephen Kaye, Charlene Harrington, and Mitchell P. LaPlante. 2010. “Long-Term Care: Who Gets it, Who Provides it, and How Much?” Health Affairs 29:1, 17–8, 21.
  6. MetLife Mature Market Institute. 2012. “Market Survey of Long-Term Care Costs,” 4.
  7. Federal Interagency Forum on Aging-Related Statistics. 2012. “Older Americans  2012: Key Indicators of Well-Being,” 57.
  8. Kaye et al., 2010, 18.
  9. U.S. Department of Health and Human Services. 2013. “What’s Medicare?” 1–4.
  10. Ibid.
  11. Mitchell LaPlante. 2013. “The Woodwork Effect in Medicaid Long-Term Services and Supports,” Journal of Aging &Social Policy, 25:2, 161–80.
  12. Karen Dorman Marek, Frank Stetzer, Scott J. Adams, Lori L. Popejoy, and Marilyn Rantz. 2012. “Aging in Place Versus Nursing Home Care: Comparison of Costs to Medicare and Medicaid,” Research in Gerontological Nursing 5:2, 123–9.
  13. Terence Ng, Charlene Harrington, and Martin Kitchener. 2010. “Medicare and Medicaid in Long-Term Care.” Health Affairs 29:1, 22–8.
  14. Martin Kitchener, Terence Ng, Nancy Miller, and Charlene Harrington. 2006. “Institutional and Community-Based Long-Term Care,” Journal of Health and Social Policy 22:2, 31–50.
  15. H. Stephen Kaye, Mitchell P. LaPlante, and Charlene Harrington. 2009. “Do Noninstitutional Long-Term Care Services Reduce Medicaid Spending?” Health Affairs 28:1, 262–72.
  16. Kitchener et al., 2006.
  17. Janet O’Keeffe, Paul Saucier, Beth Jackson, Robin Cooper, Ernest McKenney, Suzanne Crisp, and Charles Moseley. 2010. “Understanding Medicaid Home  and Community Services: A Primer,” 21–36; Allen J. LeBlanc, M. Christine Tonner, and Charlene Harrington. 2001. “State Medicaid Programs Offering Personal Care Services,” Health Care Financing Review 22:4, 155–73.
  18. Pamela Doty. 2000. “Cost-Effectiveness of Home and Community-Based Long-Term Care Services,” U.S. Department of Health and Human Services.
  19. Andrea Wysocki, Mary Butler, Robert L. Kane, Rosalie A. Kane, Tetyana Shippee, and Francois Sainfort. 2012. “Long-Term Care for Older Adults: A Review of Home and Community-Based Services Versus Institutional Care,” Comparative Effectiveness Review No.81.
  20. Ibid.
  21. R. Kane and R. Ladd. 1998. “The Heart of Long-Term Care,” New York: Oxford University Press. As cited in Doty, 2000.
  22. Kaye et al., 2009.
  23. Ibid.
  24. Kitchener et al., 2006.
  25. Ibid.
  26. Karen Dorman Marek, Lori Popejoy, Greg Petroski, David Mehr, Marilyn Rantz, and Wen-Chieh Lin. 2005. “Clinical Outcomes of Aging in Place,” Nursing Research, 54:3, 202–11.
  27. Ibid.
  28. “Arizona Long Term Care System,” County Supervisors Association of Arizona website ( Accessed 31 October 2013.
  29. Tanaz Petigara and Gerard Anderson. 2009. “Program of All-Inclusive Care for the Elderly,” Health Policy Monitor Survey No.13.
  30. Ibid.
  31. “What is PACE?” National PACE Association website (,_What_and_Where_is_PACE?). Accessed 31 October 2013.
  32. Victor Hirth, Judith  Baskins, and Maureen Dever- Bumba. 2009. “Program of All-Inclusive Care (PACE): Past, Present, and Future,” Journal of American Medical Directors Association 10:3, 155–60.
  33. Marek et al., 2012.
  34. Wysocki et al., 2012.
  35. Doty, 2000.
  36. Wysocki et al., 2012.
  37. Charlene Harrington, Terence Ng, Stephen H. Kaye, and Robert  Newcomer.  2009. “Home and Community Based Services: Public Policies to Improve  Access, Costs, and Quality,” University of California, San Francisco Center for Personal Assistance Services.
  38. Wysocki et al., 2012.
  39. Kaye et al., 2010.
  40. Jennie  Chin Hansen and Andrew Scharlach. 2012. “Community Services,” in Independent for Life: Homes and Neighborhoods for an Aging America, ed. Henry Cisneros et al., Austin: University of Texas Press, 77; Lynn Feinberg, Susan C. Reinhard, Ari Houser, and Rita Choula. 2011. “Valuing the Invaluable:  2011 Update, the Growing Contributions and Costs of Family Caregiving,” Insight on the Issues 51, 1.
  41. Wysocki et al., 2012.
  42. Harrington et al., 2009.
  43. Ibid.
  44. Marek et al., 2005.
  45. David C. Grabowski. 2009. “The Cost-Effectiveness of Home and Community-Based Long-Term Care Services,” presentation for the Hilltop  Institute Symposium, Home  and Community-Based Services: Examining the Evidence Base for State Policymakers.
  46. AARP Public Policy Institute. 2006. “The State of 50+ America 2006.”
  47. Marek et al., 2005.
  48. Ernest Gonzales and Nancy Morrow-Howell. 2009. “Productive Engagement in Aging-Friendly Communities,” Generations 33:2, 51–8.
  49. LaPlante, 2013.
  50. Ibid.


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