Medicare will become a much bigger player in funding long-term care under the terms of a tentative class action lawsuit settlement brought against the federal government.

Under the settlement of Jimmo v. Sebelius, announced in October, the U.S. Department of Health and Human Services has agreed to relax Medicare’s requirements for enrollees who seek coverage for skilled nursing and therapy services in institutional or home care settings. Medicare’s policy has been to provide those services only for patients who have the potential to improve; that left patients who needed care to maintain their current health status to fend for themselves. Under the settlement, the key criteria for coverage will be a demonstrated need for skilled care.

Under the settlement, standard nursing home care still won’t be covered by Medicare, beyond current limits. But the expansion of skilled care is expected to lighten the financial burden of tens of thousands of Medicare enrollees, says Judith Stein, director of the Center for Medicare Advocacy (CMA) and a lawyer who represented plaintiffs in the class action. “This is a victory for all Medicare beneficiaries who have chronic conditions,” she said.

Stein noted that nearly half of Medicare enrollees have three or more chronic conditions—although not all of those conditions require skilled care.

Once completed, the determination of coverage eligibility will hinge on whether skilled care is needed in order to provide safe and effective therapy.

In the case of nursing home care, Medicare would provide its standard coverage—up to 100 days of skilled nursing care or rehabilitation if it is ordered by a physician. Patients must have already been enrolled in Medicare Part A (hospitalization), and have been formally admitted to a hospital for at least three consecutive days. After 20 days, patients are responsible for a small co-payment.

For outpatient physical and speech therapy, there is a combined annual dollar coverage limit of $1,880, although that can be appealed. “Patients who hit the dollar cap should ask their therapist or ordering physician to write a letter explaining why the services are necessary, and file an appeal,” said Stein.

The claims of more than 10,000 Medicare beneficiaries who were denied claims for skilled services before Jan. 18, 2011 (when the lawsuit was filed) will have their claims re-examined under terms of the settlement.

The financial impact on Medicare isn’t clear. But it cannot be good. Some argue the program’s direct costs for providing the additional coverage will rise; the higher costs could be offset if the new preventive services reduce the need for acute care and hospitalization.

But a paper from Health Affairs shows how total health care spending will increase over the next 10 years. By 2020, it is projected to exceed $4 trillion dollars, representing nearly 20 percent of the entire American economy.

“Any help you can give people is important,” said elder law attorney Harry Margolis of Margolis & Bloom. “If the additional coverage means staying in a skilled nursing facility a little longer so the patient goes home a bit healthier, or care at home that prevents re-hospitalizations or moving to a nursing home—the more care of this type that you can provide, everyone is better off.”

The settlement comes just as several little-noticed features of the Affordable Care Act (ACA) are being rolled out that also promise improvements in long-term care services away from institutional settings.

The ACA encourages states to shift their Medicaid-based long-term care services away from institutional settings such as nursing homes and into community and home-based care. This part of the law has the potential to be a major game-changer in the way long-term care is financed in the United States because Medicaid is the nation’s largest source of long-term care funding.

Experts argue that many institutionalized patients could get along well at home with the proper care support—and they’d be happier. The cost of a semi-private room in a nursing home care this year averages $73,000; community-based care can be provided for $7,000 to $12,000 annually.