Getting older sure beats the alternative, but most baby boomers shudder to think about paying the bills that usually go along with aging.

Just a few years in institutional housing can exhaust the financial resources of most middle-class Americans. Most boomers know someone whose parents have seen their entire savings gobbled up by long-term health care.

Today, a private room in a nursing home costs, on average, roughly $75,000 a year. And boomers can expect to spend quite a few years in these facilities. Today's 55-year-old man is likely to live to nearly 80. A 55-year-old woman can expect to live to nearly 83.

Do you think boomers' offspring will let the oldsters move in with them? Fahgeddaboudit!

Maybe Medicare will cover long-term nursing home costs? Wrong! It pays only for a limited stay after hospitalization and imposes other restrictions.

The "solution" many middle-class Americans embrace is to spend themselves into the poorhouse. They consciously draw down their savings - often transferring as much as possible to their kids - so they can qualify for long-term care benefits under Medicaid, the federal-state health program for the poor.


But the prospect of millions of boomers qualifying for Medicaid creates near panic among state and federal officials already facing huge budget shortfalls. Roughly a third of Medicaid spending already goes to long-term care. And that's about 40 percent of all long-term care spending in America.

Unfortunately, it's not all spent in optimal fashion. Instead of helping the elderly stay in their own homes with part-time care or help from family and friends, bureaucratic rules give preference to subsidizing care provided in the most expensive setting possible - nursing homes.

A recent AARP study concluded that, for what it costs to support just one elderly or disabled Medicaid patient in a nursing home, the program could support three patients in home and community-based settings. The horrible irony of Medicaid is that it forces taxpayers to pay more for the care the elderly prefer least.

Fortunately, some people have been thinking how to revamp our long-term care system to fix these design problems. Their goal: to save money while helping people live out their twilight years in their own homes.

This rethinking has three elements.

The first is to change Medicaid so states can redesign their programs to emphasize in-home delivery of long-term services rather than delivery in expensive institutional settings. Today, states can ask Washington for special waivers to try new approaches. But they have to go through bureaucratic hoops to get permission.

Vermont is one state that has made it through the hoops. Since receiving a waiver in 2005, the Green Mountain State has boosted its use of home-based care, cut costs and spread the same dollars further.

The waiver also let Vermont make strong use of "consumer-directed" services, so that the elderly themselves have a greater say in how money is used. It turns out that people strongly prefer less expensive home-based assistance - with friends, relatives and neighbors having important roles in their care. It's a win-win solution for the elderly and for taxpayers.

Medicaid law should be revised to let states adopt approaches like this without having to come and plead with Washington.

The second element is to boost the use of long-term care insurance. Few Americans have it, and most of the policies that are purchased cover only a portion of approved nursing home care. What's needed is insurance that will pay cash benefits to help policyholders get the services they need in their homes.

The president or first lady Michelle Obama could do a lot to reduce retirement housing and care costs - and help Americans remain independent in their golden years - by highlighting the importance of this kind of insurance.

The third reform element would be for Congress to reconsider Living with Independence, Freedom and Equality (LIFE) accounts, an idea included in one of President George W. Bush's budgets, but ignored by lawmakers. Family members and employers could supplement a person's own deposits to tax-advantaged LIFE accounts, which could be used for home-based care services as well as other critical needs. States might even provide limited credits as matches for LIFE retirees who eschew expensive Medicaid institutional care.


Today's health care reform debate focuses on expanding insurance coverage for working Americans. That's important, of course. But we must also start to figure out how to pay for the future housing and care needs of aging, frail boomers. The sooner we start, the easier it will be for tomorrow's retirees to avoid institutionalization and stay in their homes with loving support from their family and friends.

* Stuart Butler is vice president for domestic policy issues for the Heritage Foundation (www.heritage.org).