Residential care facilities (RCFs) are important providers of long-term care (LTC) services. RCFs provide services and residential settings for persons with chronic illnesses and physical or mental impairments who need assistance with activities of daily living (ADLs), such as bathing and dressing, and health-related services, such as assistance in managing medications. In 2010, approximately 31,100 RCFs served 733,300 residents of all ages with a wide range of physical and mental impairments (Caffrey et al., 2012; Park-Lee et al., 2011). Most RCFs serve individuals who pay privately, but 43 percent of RCFs have at least one resident whose LTC services are at least partly paid by Medicaid (Park-Lee et al., 2011) , and about a fifth of residents had some of their LTC services paid by Medicaid (Caffrey et al., 2012).
States vary in the degree to which they have developed an array of home and community-based services (HCBS) that include a role for RCFs (Stone & Reinhard, 2007). In 1981, Oregon became the first state to use the Medicaid HCBS waiver program to cover services in residential care settings for older people. Initially, few states followed its lead (O'Keeffe & Wiener, 2005), but by 2009, 41 states used Medicaid to pay for services in RCFs (Carlson et al., 2010). State interest in funding Medicaid services in RCFs is fueled by a desire to offer a full array of HCBS, to reduce nursing home use, to achieve the economies of scale of nursing home care without the undesirable characteristics of institutional care, and to achieve cost savings (O'Keeffe & Wiener, 2005).
Some states view RCFs as an important component of efforts to alter the balance between institutional and HCBS spending (Kane & Cutler, 2008; Wiener & Lutsky, 2001). For example, Oregon and Washington State expanded the provision of services in RCFs specifically to reduce nursing home use and to increase options for individuals with LTC service needs who want to live in the community. Both states now serve more Medicaid beneficiaries in RCFs than they do in nursing homes (Carlson et al., 2010).
States have several options to pay for LTC services in RCFs through the Medicaid program. States can cover personal care services under the Medicaid state plan; home health, private duty nursing, and physical or occupational therapy services in RCFs; residential care services and personal care under Medicaid HCBS waivers; as part of Section 1115 research and demonstration waivers; and under HCBS options established by the Affordable Care Act, including the modified Section 1915(i) of the Social Security Act. Under Medicaid HCBS waivers, Medicaid beneficiaries must meet nursing home level of care criteria, while under the personal care and other options, states may serve a less severely impaired population. Whichever Medicaid coverage mechanism the state uses, it may only pay for services. Federal Medicaid law prohibits payment for room and board except in institutions, such as nursing homes, intermediate care facilities for persons with intellectual and developmental disabilities, and hospitals (O'Keeffe et al., 2010). In 2009, 36 states and the District of Columbia used Medicaid HCBS waivers to cover residential care services (Mollica, 2009); 34 states and the District of Columbia covered personal care under their Medicaid state plan (Eiken, Sredl, Burwell, & Gold, 2010); and seven states used both Medicaid HCBS waivers and state plan personal care to serve Medicaid beneficiaries in RCFs.
An important Medicaid policy concern is whether and how RCFs that serve Medicaid beneficiaries differ from those that do not regarding the type and level of residents' needs and the type and level of services available and provided. The characteristics of the RCFs that can serve Medicaid beneficiaries are determined by a complex interplay of state licensing and regulatory requirements and Medicaid policy. For example, not all states allow RCFs to serve people who need nursing home-level care (e.g., Alaska, Mississippi, Nevada, and Virginia). Moreover, Medicaid beneficiaries are, by definition, relatively low income and are likely to be disproportionately ethnic and racial minorities. If RCFs view these groups as less desirable than higher-income White residents, they may discriminate against these populations and Medicaid beneficiaries may be limited to facilities with fewer services and amenities because only those facilities will take them as has occurred with nursing homes (Smith, Feng, Fennell, Zinn, & Mor, 2007). In addition, although few data are available, Medicaid payment rates in RCFs are believed to be substantially below those of private pay residents. Thus, income-maximizing facilities may not accept Medicaid residents or may limit the number they serve. As a result of lower payment levels, facilities accepting Medicaid residents may also have fewer financial resources to provide physical amenities, services, and staff.