This includes a commitment to pay for the medical care of elderly people living in nursing homes.
However, ministers have rejected calls for the State to pay for all of the costs incurred by people in care.
The Royal Commission on long term care for the elderly called on the government to pay all of the costs but ministers have decided that is "unaffordable".
They have agreed to tackle claims that the NHS is ageist.
A National Service Framework for Older People will be published later this year.
It will set out national standards for providing care to elderly people and "ensure ageism is not tolerated" in the NHS.
The modernisation programme will also include major investment in intermediate care services.
These will centre around cottage hospitals and in new facilities and will be used to provide "step down" care for many elderly patients.
Main changes
Free medical care for elderly people in nursing homes
Elderly to recuperate in intermediate care hospitals
Greater integration between the NHS and social services
National standards on caring for the elderly to be published
Rapid response teams to provide emergency care for people at home
Intensive care services to help elderly people to recover from major illness
Ministers believe thousands of hospital beds could be freed up by developing intermediate care services.
They maintain that many elderly patients remain in hospital in beds unnecessarily because of a lack of suitable facilities.
An extra £900m is to be invested in intermediate care services by 2004.
Social services
As part of the reforms, the NHS and social services are to work more closely together.
Rapid response teams, made up of nurses, care workers, social workers, therapists and GPs, will provide emergency care for people at home and help to prevent unnecessary hospital admissions.
Intensive rehabilitation services will help older people regain their health and independence after a stroke or major surgery.
There will also be greater investment in mental health services, increasing to an extra £300m annually by 2004.