In a unique experiment being watched nationally, Tennessee is revising its Medicaid long-term care options to make it harder for certain low-income elderly people to qualify for state-paid nursing home care.

The state is focusing on seniors who officials say need assistance but not in a nursing home and not with an equivalent level of treatment in home or community-based services. The state TennCare Medicaid program will pay up to $15,000 a year to help these participants stay in their homes or receive meals and other services in adult day care facilities or other less restrictive community settings. Under its old program, all participants qualifying for long-term care under TennCare—whether they were in a nursing home or other care—were entitled to benefits equal to the cost of a nursing home.

The program, which has received federal approval and began this month, is the first of its kind in the nation because it creates this new category of patients who don’t qualify for nursing home care. Up to now, under federal law, everyone who receives long-term care under Medicaid first had to qualify to be admitted to a nursing home.

“Federal law requires that program eligibility be tied to eligibility for nursing homes,” said Matt Salo, executive director of the National Association of Medicaid Directors. “Tennessee is stepping ahead to create this new category of at-risk individuals whose benefits are not linked to nursing homes.”

But consumer advocates worry that the $15,000 annual limit will fall short of meeting the needs of some seniors, who could end up going without services or relying on funds from family or friends. Gordon Bonnyman, executive director of the Tennessee Justice Center, said he feared that “a lot of frail people are not going to make it on the reduced package.”

State officials say the money should be sufficient and that seniors whose need for care increases may qualify for more extensive TennCare benefits: nursing home or community-based care up to $55,000 a year.

TennCare hopes to save $47 million from the new program this year. In the longer run, the state expects by retooling the system it will be better prepared to accommodate an expected spike in enrollees as baby boomers grow older.

TennCare’s long-term care system serves 23,705 elderly. TennCare, like Medicaid in other states, is financed with federal and state funds. In addition to low-income seniors, it covers children, pregnant women and the disabled. Tennessee’s financial share for long-term elderly care is $1.1 billion per year.

Nationally, Medicaid plays a key role in long-term care, covering more than two-thirds of all nursing home residents and footing more than 40 percent of the industry’s costs. The average cost per year for nursing home care nationally is about $80,000.

The new program is the second time in three years TennCare has moved to reduce use of nursing homes. In 2009, the state obtained permission from the federal government to offer nursing home patients—and new long-term care enrollees—the option of receiving care in a family- or community-based setting. Under that program, nursing home care would only be required if the alternative setting could not meet the patient’s needs or if the cost of those needs exceeded the $55,000 per year.

That change has been successful. In 2010, around 83 percent of Tennessee’s long-term Medicaid patients were in nursing homes, with 17 percent in home and community settings under a prior waiver. Today, 66 percent of patients are in nursing homes and 34 percent are receiving home- and community-based services.

Dr. Melinda Henderson, executive director at the UnitedHealthcare Community Plan, one of three managed care organizations that administer Tennessee’s Medicaid system, said patients overwhelmingly choose not to be in nursing homes.

“You kind of lose your independence at a nursing home,” said Sarah Stewart, who lives in Bolivar in rural southwest Tennessee. “I just prefer to be at home and be independent.”

Stewart, 78, had a heart attack in 2008 and is legally blind because of macular degeneration. She was hospitalized for breast cancer surgery in 2011 and put in a nursing home afterward, an experience she did not enjoy, in part, she acknowledged, because she was not allowed to have Molly, her Chihuahua, with her.

The change in the program in 2009 enabled her to leave nursing care last fall and go home, where a caregiver helps her with shopping, housework and personal needs for six hours a day, five days a week. She has five children, eight grandchildren and 13 great-grandchildren — virtually all of them living out of state.  But home care “is making me comfortable,” she said. “I’m very pleased.”

The new program is an outgrowth of what officials learned from the 2009 change.  They said they found that many people didn’t need more than $15,000 a year in assistance.

State officials decided they could raise the level of need for patients to qualify for full long-term care benefits, whether in a nursing home or elsewhere.  The legislature approved the change in April, as did the federal Centers for Medicare & Medicaid Services.

Under the new regulations, the current requirement  – that someone need help with an “activity of daily living” such as dressing or using the bathroom – has been replaced by a complicated weighted point system that makes it considerably more difficult for patients to reach the standard to qualify for nursing home care.

The focus of this endeavor, said TennCare Assistant Commissioner Patti Killingsworth, is to make sure healthier patients who currently qualify for nursing facilities are served “more appropriately” in community-based settings. “We want nursing homes to target patients who truly need their services,” Killingsworth said. The system will spend less, she acknowledged, “but we will serve more people with home- and community-based care.”

Killingsworth said 40 percent of elderly Medicaid patients receiving community benefits before the change spent “less than $15,000 per year” and if they were entering the system now would receive “an appropriate level of benefits.”

Bonnyman, the consumer advocate, said TennCare has not done the analysis to warrant this assertion: “On paper what they’re talking about looks fine,” he said. But “all of this starts with a mandate designed to save $47 million.”

Jesse Samples, executive director of the Tennessee Health Care Association, representing the majority of Tennessee’s 330 nursing homes, agreed with Bonnyman that TennCare’s chief motivation is to save money and also agreed with Killingsworth that nursing homes were the target.

“In an ideal world we would increase funding for all categories of services,” Samples said. “But we’re playing a zero-sum game here. In order to get money for home and community-based services, you have to take it from somewhere else. That would be nursing homes.”