[Senate Hearing 107-491]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 107-491

 BROKEN AND UNSUSTAINABLE: THE COST CRISIS OF LONG-TERM CARE FOR BABY 
                                BOOMERS

=======================================================================

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             MARCH 21, 2002

                               __________

                           Serial No. 107-22

         Printed for the use of the Special Committee on Aging


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                            WASHINGTON : 2002
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                       SPECIAL COMMITTEE ON AGING

                  JOHN B. BREAUX, Louisiana, Chairman
HARRY REID, Nevada                   LARRY CRAIG, Idaho, Ranking Member
HERB KOHL, Wisconsin                 CONRAD BURNS, Montana
JAMES M. JEFFORDS, Vermont           RICHARD SHELBY, Alabama
RUSSELL D. FEINGOLD, Wisconsin       RICK SANTORUM, Pennsylvania
RON WYDEN, Oregon                    SUSAN COLLINS, Maine
BLANCHE L. LINCOLN, Arkansas         MIKE ENZI, Wyoming
EVAN BAYH, Indiana                   TIM HUTCHINSON, Arkansas
THOMAS R. CARPER, Delaware           PETER G. FITZGERALD, Illinois
DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              CHUCK HAGEL, Nebraska
                    Michelle Easton, Staff Director
               Lupe Wissel, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator John Breaux.........................     1
Prepared statement of Senator Larry E. Craig.....................     3
Prepared statement of Senator Debbie Stabenow....................     3
Statement of Senator Jean Carnahan...............................    40

                                Panel I

Hon. Paul Patton, Governor of Kentucky, Frankfort, KY............     4
Hon. David Walker, Comptroller General, U.S. General Accounting 
  Office, Washington, DC.........................................    17

                                APPENDIX

Statement from the American Association of Homes and Services for 
  the Aging......................................................    49
Statement from Yung-Ping Chen, the Frank J. Manning Eminent 
  Scholar's Chair in Gerontology at the University of 
  Massachusetts Boston...........................................    55
Testimony from the American Health Care Association..............    60

                                 (iii)

  

 
 BROKEN AND UNSUSTAINABLE: THE COST CRISIS OF LONG-TERM CARE FOR BABY 
                                BOOMERS

                              ----------                              


                        THURSDAY, MARCH 21, 2002

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:35 a.m., in 
room SD-628, Dirksen Senate Office Building, Hon. John Breaux 
(chairman of the committee) presiding.
    Present: Senators Breaux, Carper, and Carnahan.

       OPENING STATEMENT OF SENATOR JOHN BREAUX, CHAIRMAN

    The Chairman. The Committee on Aging will please come to 
order. Our ranking member, Senator Craig, is on his way, so we 
will go ahead and begin. Our Committee on Aging, as most of you 
know who are here as guests and also our witnesses, has a 
responsibility to really look ahead and see that we as a nation 
are prepared to address the long-term health needs of the 
pending age wave of 77 million baby boomers that are part of 
our country who are right on the brink of becoming eligible for 
entitlement programs such as Social Security and Medicare.
    Over the past few years, we have had many hearings on the 
question of Social Security reform and Medicare reform, and we 
have tried to find some solutions to these very, very difficult 
problems.
    Now, of equal importance, we are focusing in on the 
problems that we as a nation are experiencing along with our 
states on the question of Medicaid, a combination Federal-state 
program, in trying to find out what the problems are and what 
we as a nation might do now to prepare for this problem that is 
awaiting us all.
    Medicaid was originally designed, as most people know, as a 
health program to provide health care for our nation's people 
who are on the edges and, in fact, are in poverty themselves. 
It was basically a program for poor people to provide them 
adequate health care.
    It is really tearing into our nation's de facto long-term 
health program, and it was never intended to do that. But most 
people in this country now get long-term health care through 
the Medicaid program, which was originally designed only to 
provide health care for people in poverty-type conditions.
    The unfortunate thing is that you see people having to 
spend down their life savings in order to be able to qualify. 
That is degrading and it is not how it should work. So I think 
it is clear that we as a nation can do much better as we focus 
in on solutions to long-term health care.
    Clearly trying to make the Medicaid program a long-term 
health care program without significant changes is simply not 
going to work. It was never intended to do that. We have sort 
of forced it to try and meet that need. It is interesting to 
note that the Federal Employees Health Benefit Plan, which I 
and folks behind me are probably all in and nine million other 
Federal employees as well, is beginning to offer a program for 
long-term health care insurance for Federal workers.
    I think that that sets a good example as to what are the 
possible solutions to this very serious problem. But it is an 
issue that just cannot continue to be ignored and swept under 
the rug. We have two distinguished witnesses this morning to 
present testimony.
    We are delighted to have Governor Paul Patton of Kentucky 
who is a distinguished Governor back in Kentucky. It is 
interesting that they tell me that, Paul, you were the first 
Governor of Kentucky in 200 years to be reelected to a second 
consecutive term. That is an outstanding achievement. In my 
State of Louisiana, you get in once, you are almost guaranteed 
a second term.
    You serve now as vice chairman of the National Governors' 
Association, and in July will become the chairman of the NGA, 
and you have been a real leader in this whole effort in 
determining what we do as a nation in long-term health care and 
health care problems, and we are very, very pleased to have you 
give us your thoughts on this issue today.
    We also are delighted to have once again David Walker who 
is Comptroller General of the General Accounting Office and has 
been there since 1998. I want to thank him for appearing once 
again. You have been with us, I think, for eight hearings on 
long-term care and the problems of Medicare and Social 
Security.
    GAO has just done an outstanding job for this committee and 
for many other committees in the Congress in doing special work 
on some very significant issues. Mr. Walker himself has a long 
history on these entitlement reform issues and has served as a 
public trustee for both Social Security and Medicare, and we 
have worked with him on these issues and have been very pleased 
with the work that he has personally done, as well as the work 
that the General Accounting Office has done, particularly for 
this committee.
    Gentlemen, we thank you both. Governor you may go first. If 
you would like to start, we would be pleased to have your 
testimony.
    [The prepared statement of Senator Breaux follows along 
with prepared statements of Senator Craig and Senator 
Stabenow:]

               Prepared Statement of Senator John Breaux

    This committee has the responsibility to look ahead and see 
that as a nation we are prepared to handle the long-term care 
needs of the pending ``age wave'' of 77 million baby boomers. 
Over the past few years we have had many hearings on Social 
Security and Medicare reform and tried to move closer to 
solutions. Now, of equal importance, we are tackling Medicaid 
reform and examining Medicaid's growing role in financing long-
term care.
    Although Medicaid was originally designed to provide health 
care to low-income women and children, it has become our 
country's ``de facto'' payor of long-term care for elderly and 
disabled. Most people do not know that Medicaid expenditures 
are now outpacing Medicare nor do they realize that Medicaid is 
the second largest expenditure for state budgets. The 
unsettling notion here is that we have no real, comprehensive 
long-term care system in this country and yet we are spending 
billions of dollars for a system that was not designed--it just 
evolved. Unfortunately, the system we have is inefficient, 
outdated, incomplete and unable to meet the needs of current or 
future recipients.
    Simply stated, this is an issue that just can't wait.
                                ------                                


               Prepared Statement of Senator Larry Craig

    Thanks to Chairman Breaux's leadership, this committee has 
held many hearings on the issue of long-term care. Today we are 
holding what may prove to be one of the most important hearings 
on the subject. This hearing will be a hard look at the 
finances that will be required to care for the 77 million aging 
baby-boomers as they start retiring within the next ten years.
    This committee is very aware that the long-term care system 
that we have in place now most likely will not be able to 
accommodate the needs of the soon-to-be-retiring. Not only does 
our current system lack a coherent system of care that seniors 
can turn to for help, but as this hearing will demonstrate, a 
solid financial foundation for the future may not be in place 
either.
    Last week this committee heard from LT. Governor of Idaho, 
Jack Riggs, and Karl Kurtz, the Director of Idaho Health and 
Welfare regarding the tight fiscal constraints they have to 
consider when developing Medicaid and long-term care policies. 
States like Idaho are having to make substantial changes right 
now in their policies to provide care to current beneficiaries, 
and this says nothing of the changes they will need to make to 
prepare for the future. As I am sure we will hear from Governor 
Patton, these fiscal strains are felt in all states.
    If long-term care financing changes are not made to our 
current system, both state and federal governments may be 
unable to meet the needs of the many seniors who depend on 
these programs. This country has focused many debates on the 
important need to keep Social Security and Medicare solvent, 
yet little attention has been given to the need to shore up 
long-term care finances. For this reason, I am happy the 
committee is looking at this topic and I welcome the 
opportunity to discuss this issue further.
    I am delighted that Governor Patton is here to share some 
of the issues that he is facing in Kentucky and I look forward 
to Mr. Walker's testimony and his analysis on projected 
spending of long-term care.
                                ------                                


             Prepared Statement of Senator Debbie Stabenow

    Chairman Breaux and Senator Craig, I thank you both for 
holding this important hearing. Long-term care services are 
becoming increasingly important. As our population ages and 
lives longer, the amount of care we need increases. I am glad 
you are bringing attention to the fact that the way we pay for 
these health care costs today is increasingly problematic and 
will need to change as the baby boomers begin to require these 
services. Today's hearing will provide a basis from which we 
can create effective and efficient changes for covering these 
costs.
    Today, Medicaid pays a significant amount of long-term care 
costs. If patients do not meet the strict qualifications for 
Medicaid, often their only other option is to pay for these 
critical services out of pocket. Due to the increasing costs of 
health care and prescription drugs, this option is not 
available to many of our seniors. We all know that this problem 
will only get worse as the baby boomers get older. Medicaid 
funds are already stretched in many states, as we discussed 
last week. As more and more seniors enter the Medicaid roles, 
those funds, as they are structured now, will not be adequate 
to help provide our seniors with quality long-term care.
    It is vital that we review how long-term care is funded. we 
must also review ways in which we can educate and encourage 
baby boomers and young people alike to invest in long-term care 
insurance. I am very excited about the new initiative offered 
to federal government employees and their families for 
purchasing long-term care insurance. We must consider programs 
like this and other innovative methods in order to ensure that 
we provide our seniors with the quality care that they deserve.
    I am very interested in hearing from our witnesses today on 
this important issue.

STATEMENT OF HON. PAUL PATTON, GOVERNOR OF KENTUCKY, FRANKFORT, 
                               KY

    Governor Patton. Thank you, Chairman Breaux, for the 
opportunity to appear before this Special Committee on Aging 
and discuss some serious problems with long-term care and the 
Medicaid program. I do appear both as Governor of Kentucky and 
on behalf of the National Governors' Association, and quite 
simply we have at present a crisis in Medicaid that is heading 
toward catastrophe, and so we need to have some short-term 
relief, and we need long-term solutions.
    During the years when revenue was increasing, states were 
able to keep up more or less with the growing Medicaid 
expenditure. It was not easy given the pressure to find money 
for education, public protection, and other vital state 
services, and it also was not easy given the rapid growth of 
the cost of Medicaid.
    The return of medical inflation and the new dynamic of 
pharmacy spending, growth of 20 to 25 percent a year, have made 
it a real challenge. The demands have been such that Medicaid 
now takes on average 20 percent of state budgets across the 
country.
    Let me illustrate the problem by relating our experiences 
in Kentucky since I became Governor 6 years ago. During that 
period, Kentucky state government revenue has increased about 
26 percent. The consumer price index has increased 16 percent, 
so we have had real growth, but we have experienced increases 
in our expenditure for elementary and secondary education of 
only 20 percent. That is it did not get its proportional part 
of the real growth.
    Our social programs only grew by 18 percent, barely kept up 
with inflation. Our Medicaid program has increased 47 percent, 
almost double the growth in actual state revenue.
    When revenue was growing, we really could not say no to the 
real medical needs of our needy citizens. Now that revenue 
growth is stagnant, we have no other choice. While my 
legislature was willing to give Medicaid more than its share of 
our growth revenue over the past 6 years, it is unwilling to 
take money away from other needed programs or to raise taxes to 
pay for double digit annual increases in the cost of providing 
the services that our Medicaid program has promised to our 
people.
    Because of the downturn in the national economy, the 
Kentucky general fund revenue in the second year of the next 
biennium, and we are just right in that budget right now, is 
estimated to be less than the originally budgeted expenditures 
for the current fiscal year. Our challenge is to find ways to 
not cut services when we have less money than we had the year 
before.
    There is absolutely no way that we can absorb a 10-percent 
increase in Medicaid with a zero percent increase in revenue. 
Our only choices are to increase taxes, and that is not going 
to happen, or decrease services, unless the Federal Government 
steps to the plate and helps us.
    We will be forced, and I think this will be true of all the 
states, to cut optional services and/or optional eligibles by 
the end of the next biennial budget cycle. This is not what 
government is supposed to be. So while I am here today to 
discuss the burden of long-term care costs in the Medicaid 
program, I want to make an urgent plea for some short-term 
relief, specifically, a temporary increase in the Federal match 
rate to states.
    I know, Mr. Chairman, that you and perhaps other members of 
the committee serve on the Finance Committee, so I would like 
to ask you to carry this request for us. It is a very important 
issue to the states. We are having a hard time keeping our 
heads above water.
    But there is another reason that Medicaid programs are in 
trouble. Demand for long-term care service under the Medicaid 
program is growing so rapidly that it will bankrupt state 
budgets unless another form of financing is found, and because 
of this, Mr. Chairman, I am here to tell you that the Medicaid 
program is indeed broken and unsustainable.
    Traditionally, states took care, as you say, of the poor 
and the Federal Government took care of the needs of the 
elderly. Medicaid was created to provide health care to those 
on welfare, mostly moms and kids and folks that we really 
expected to eventually get back into the workplace.
    But it is fast becoming the program to fund long-term care 
services in our country, and because the cost of caring for 
this group is so great, it is crowding out our ability to care 
for our traditional state mandates. Today, older and disabled 
beneficiaries account for only one-third of Medicaid 
beneficiaries, but account for more than two-thirds of Medicare 
expenditures.
    A good bit of the financial burden of caring for the 
elderly through Medicaid comes to the states through our own 
decisions to provide coverage for optional programs. In fact, 
83 percent of optional Medicaid spending is devoted to the 
elderly and disabled.
    Pharmacy is an optional program, although all 50 states 
provide pharmacy services. Various spend-down programs for the 
poor elderly are also optional, but ending these programs is 
not a realistic option. What we need is flexibility in Federal 
law to tailor the resources that we have to stretch them as far 
as possible. Right now it is all or nothing. If you run a 
program by Medicaid, you cannot limit benefits or require 
adequate cost sharing, for example.
    So I strongly urge that for those optional programs and 
services, the states should be given broad latitude to design 
an affordable program. The states have tried to deal with long-
term care services in as responsive a way as possible. Through 
the creation of home and community based waiver programs and 
services such as adult day care, states have sought to give the 
elderly choices other than institutional placement, options 
which the states hope would cost less than inpatient nursing 
care, but we found in Kentucky--and I do not think it is unique 
among the states--that the demand for these services is so 
great that the alternatives ended up being program expansions 
with no commensurate reduction in facility spending.
    Why? For every individual in a nursing home, it is 
estimated that there are as many as four people in the 
community who need care. There is a sense of urgency in my 
remarks today, Mr. Chairman, because at the time when state and 
Medicaid budgets are rising annually at double digit inflation 
rates and most states are facing budget deficits, we must find 
long-range solutions or we will be ill-prepared to meet the 
long-care needs of those 77 million baby boomers that you 
referred to.
    This is not an issue that can be put on the back-burner 
until Social Security and Medicare are reformed. It is an issue 
that will not wait. Again, I congratulate you for your 
leadership, Mr. Chairman, and that of the members of the 
committee for having the foresight to begin resolving this 
crisis before the real flood of elderly persons comes into the 
system.
    No doubt hard questions about services, funding, 
expectations, patient responsibility, shared program 
administration and Federal/state responsibility will need to be 
asked and answered. When all the Governors met late last month 
here in Washington under the leadership of NGA Chairman 
Michigan Governor John Engler, there was absolute agreement 
that a crisis is at hand, that it must be confronted, and that 
the program must be changed if we are to serve the needs of our 
families.
    There was also consensus in calling for a national Medicaid 
commission to recommend fundamental long-term reform of the 
program. The scope of this commission would include a look at 
the current and future capability of state government to 
finance health care for populations and services that Medicaid 
currently covers, to more clearly delineate between Federal and 
state roles and responsibilities and to make recommendations on 
how health care coverage should be provided to those who are 
dually eligible for both Medicaid and Medicare.
    It was recommended that this commission be formed as 
separate from the NGA and should include bipartisan 
representatives from the administration, members of the House 
and Senate, Governors, and nationally recognized experts in the 
field.
    So I urge you to join us in supporting the creation of a 
Medicaid commission to ensure that the very best minds in our 
country can elevate this issue to the top of the national 
agenda. The commission can sort through the complex issues, 
make recommendations for changes essential to the future of 
Medicaid program, and I hope enjoy substantial bipartisan 
support at both levels of government.
    We look forward to working with you as our partners because 
we know that we need to tackle this problem together if we are 
to succeed. Again, thank you for the opportunity to be with you 
and we would answer questions at the appropriate time.
    [The prepared statement of Governor Patton follows:]

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    The Chairman. Thank you very much, Governor Patton, for a 
very precise and concise statement. We appreciate your being 
with us and for your leadership. We would like to recognize now 
Mr. David Walker, David, for any comment that you might have.

   STATEMENT OF HON. DAVID WALKER, COMPTROLLER GENERAL, U.S. 
           GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

    Mr. Walker. Thank you, Mr. Chairman.
    The Chairman. Plus charts.
    Mr. Walker. There we go. We have got some big charts for 
you. These are big numbers. You need big charts.
    The Chairman. Those may get the award for the largest 
charts, I will tell you that.
    Mr. Walker. You will need a bigger room next time.
    The Chairman. Wow.
    Mr. Walker. Mr. Chairman, it is always a pleasure to appear 
before you in your various capacities and here as chairman of 
the Special Committee on Aging to talk about a very important 
topic, and that is long-term care. I would ask, Mr. Chairman, 
that my entire statement be entered into the record if that is 
all right, and I will move to summarize it now.
    The Chairman. Without objection.
    Mr. Walker. Thank you. I think it is important to be able 
to put the issue of long-term care in context. On the right, 
Mr. Chairman, I know this is a graphic that you have seen 
previously in various capacities including your capacity as a 
member of the Senate Finance Committee.
    I think we have to put this in the broader context. Because 
of known demographic trends including the aging baby boom 
generation and rising health care costs, primarily because of 
those two reasons, the Federal Government faces severe long-
range fiscal challenges of unprecedented proportions.
    The chart on the right shows that if we assume that tax 
levels as a percentage of the economy--these are Federal tax 
levels, percentage of GDP, which is the black line--if they 
stay constant, and if we assume that discretionary spending 
grows at the rate of GDP, which is historically what it has 
done over the last 10 to 20 years, and if we assume that the 
Medicare and Social Security trustees' best estimate 
assumptions are reasonable, then this is what our future looks 
like at the Federal level, that by the year 2030, we will be 
faced with a choice of either cutting discretionary spending by 
two-thirds or raising taxes at the Federal level alone by 30 
percent or some combination thereof.
    The Chairman. The green is discretionary.
    Mr. Walker. The green is discretionary. That is correct, 
Mr. Chairman. As you know, discretionary includes certain 
things like national defense, it includes our judicial system, 
infrastructure investments, the Federal portion of education, 
and a variety of other items that are deemed to be 
discretionary spending.
    If we look out to 2050, the Federal Government faces a 
choice of either doubling Federal taxes or cutting Federal 
spending in its entirety by 50 percent. Now, again, these are 
based on CBO's projections of economic growth. It is based upon 
the Social Security and Medicare trustees' best estimate 
assumptions, and I think a reasonable assumption of what 
discretionary spending is likely to grow in the future.
    The Chairman. Could I interrupt?
    Mr. Walker. Yes, Mr. Chairman.
    The Chairman. If you had another block in there between 
2000 and 2030, you know, split the difference, and maybe 2015, 
where would that line likely to be?
    Mr. Walker. Well, as you know, Mr. Chairman, it gets 
progressively worse between 2000 and 2030. These are just point 
in time estimates, and I think one key date, Mr. Chairman, 
would be in 2016 based upon the last Social Security and 
Medicare trustees' report. That is when Social Security and 
Medicare start turning negative cash-flow which has real fiscal 
implications for the government. Even though the trust funds 
still have assets, we start running negative cash-flow at that 
point in time.
    The Chairman. In Social Security?
    Mr. Walker. Social Security and Medicare.
    The Chairman. And Medicare both.
    Mr. Walker. We would be more than happy to provide that 
information for you if you want.
    The Chairman. I think that would be helpful to show that a 
lot of Members of Congress--I do not mean to interrupt your 
testimony.
    Mr. Walker. No, that is fine.
    The Chairman. But since it is just you and I, we can do 
that. The question is a lot of members will think I am not 
going to be here in 2030, you know, somebody else will solve 
that problem then. I am looking in the short term. The short 
term really is 2015. I mean that is not that far in the 
distance as far as making changes now that will be available in 
2015.
    So I think to bring it closer to a sense of immediacy, you 
know, I think it would be helpful to concentrate on that 2016 
timeframe and let us see something on that. 2050, I mean, you 
know, nobody in this room will probably be here, I guess. Well, 
maybe.
    Mr. Walker. Well, I hope some of the people against the 
back wall will be. I am sure they do, too.
    The Chairman. As chairman of the Aging Committee, I stand 
corrected. You are right. [Laughter.]
    But I mean if you give us something on that 2015, I think 
it would be very helpful.
    Mr. Walker. I think your point is an excellent one, Mr. 
Chairman. We will do that.
    But I think while it is important to be able to help 
members understand this, and I think that clearly would be a 
help, I think members also have children and grandchildren, in 
some cases great-grandchildren. I think one of the things that 
I find that you have to do is to be able to put a face on these 
issues, and sometimes by thinking of close family members and 
loved ones, that helps to do it.
    So that is our future. It is clearly unacceptable. It is 
clearly one that we have to face some difficult choices. As you 
see the red, the red represents Medicare and Medicaid. By far, 
the fastest growing portion until we end up getting to a period 
of time where debt starts amassing and therefore interest ends 
up becoming a major portion.
    If we look on the left here, Mr. Chairman, you will see the 
projected burdens of Social Security and Medicare and Medicaid 
as a percentage of GDP, as a percentage of our economy, and you 
will see how they are projected to grow dramatically.
    Interestingly, while Medicaid clearly represents a major 
challenge for the state governments, as Governor Patton has 
noted, and while their challenge is a more immediate challenge, 
and one that obviously they believe cries out for action, at 
the Federal level, Medicaid is actually our smallest challenge, 
although a considerable one, as it relates to these three major 
entitlement programs.
    The bottom line is that we are going to have to make some 
tough choices because we now have a situation where we have 
made promises that are unsustainable, and we are going to have 
to go about reconciling the differences between what people 
want versus what they need versus what can be afforded and what 
can be sustained over the longer term.
    There is a huge expectation gap among individuals, and I 
think at the Federal and state level that ultimately we have to 
move to try to reconcile.
    The next board, I think, is helpful to be able to 
demonstrate what is happening in the long-term care area, 
because the next board will demonstrate that long-term care, 
and these are in constant 1999 dollars, is projected to 
increase significantly, as the Governor mentioned, in the years 
ahead, and the red represents the Medicaid portion of spending 
as it relates to total long-term care.
    Bottom line, Mr. Chairman, I think one of the things we 
have to keep in mind is that long-term care is not just a 
health care issue. It also comprises a variety of services for 
the aged and disabled persons that deal with maintaining 
quality of life, including housing, transportation, nutrition 
and social support, to help maintain independent living.
    Given the challenges of providing and for paying for these 
different types of services and the growing population and the 
growing needs, we think it is important to be able to look at 
this from a variety of dimensions which I lay out on page two 
of my testimony. You need to look at what is the appropriate 
division of responsibilities, not only between the Federal and 
state levels of government but also between individuals, family 
members and government and other parties, to look at the 
potential role of social insurance and financing, to do more 
with regard to education to encourage people to prepare more 
for what is likely to be a significant need in future years, to 
recognize the fact that much of this care is provided by family 
members or other friends and loved ones, and that that does 
impose certain burdens and costs on those parties, to recognize 
that we are not going to be able to fiscally sustain the 
current system. We are going to have to make some tough 
choices.
    In addition, I think it is also important to note that if 
you are going to look at Medicaid, that we need to consider 
changes in Medicaid or long-term care or long-term care as it 
relates to Medicaid and changes there as it relates to our 
broader health care challenges, Medicare and other challenges, 
because they do have domino effects.
    One of the things that the Congress is considering right 
now is whether or not to add a prescription drug benefit. 
Clearly, when Medicare was created in 1965, prescription drugs 
were not as important or prevalent. They now are. However, we 
already know that we have got an unsustainable program, and so 
we are going to have to start making some tough choices as to 
how should this program be designed, administered, how should 
the burdens be shared, and there are things that could be done 
in the short term that quite frankly we may not be able to 
fiscally sustain in the longer term. Trying to be able to 
recognize that and have that as an important part of current 
debates, we believe is imperative for our children, 
grandchildren and those that will go after them.
    So Mr. Chairman, I hope this is helpful to you, and I am 
more than happy to be able to answer any questions that you may 
have and Senator Carnahan.
    [The prepared statement of Mr. Walker follows:]

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    The Chairman. Thank you very much, Mr. Walker, for an 
excellent statement. Let me just ask you before I begin with 
the real questions a factual thing. The increases on the 
Medicare and Medicaid, the projections, would that include a 
Medicare program that would have prescription drugs in it or it 
does not?
    Mr. Walker. No. No, it does not.
    The Chairman. Because it does not now. So that does not 
even include Medicare with prescription drugs?
    Mr. Walker. No, it does not, Mr. Chairman.
    The Chairman. Obviously, if you added a $750 billion 
prescription drug ingredient to Medicare today, which some are 
advocating, that red box would be even substantially larger?
    Mr. Walker. Well, that is correct, and as you know, Mr. 
Chairman, the fastest growing cost in health care is 
prescription drugs, and while some prescription drugs serve to 
end up reducing the need for more acute care, many of them do 
not. So there is a net cost increase, because a lot of 
prescription drugs are not just with regard to extending life 
or saving life, but it is also something that people want in 
order to enhance their quality of life, but it may not 
necessarily be a need.
    The Chairman. Well, thank you very much. Governor Patton, 
thank you again for your statement. We have been joined by our 
colleague, Senator Carnahan. Senator Carnahan, do you have a 
statement you would like to make?

               STATEMENT OF SENATOR JEAN CARNAHAN

    Senator Carnahan. Thank you, Mr. Chairman. I certainly 
applaud your leadership on this issue of long-term care. This 
committee is focusing on a serious problem that is right around 
the corner. The demographics in our country are changing 
rapidly. My home State of Missouri has the 14th largest senior 
citizen population in the country. The growth of Missouri's 60 
and over population now outpaces all other age categories. 
Before we know it, the baby boomers will be retiring and 
needing long-term care services.
    We will not be prepared without laying the groundwork now. 
Most Americans probably think little about this issue until 
someone in their family needs assistance. When this situation 
arises, one of the first questions that comes to mind is what 
are the options? That is what we are discussing today, making 
sure that seniors have options.
    We need to explore and support options that allow citizens 
to live independently for as long as possible in their own 
homes and communities. That is why I have decided to cosponsor 
the Long Term Care and Retirement Security Act.
    This legislation would establish a $3,000 tax credit to 
individuals with long-term care needs or their caregivers. 
Seniors are most likely to receive long-term care from family 
members, typically wives or daughters. Caregivers often lose 
wages and benefits, sometimes even jobs, to be able to care for 
family members.
    These women provide care out of love, but to do so, they 
sometimes have to make a huge financial sacrifice. This tax 
credit would make a real difference to families struggling to 
care for an ailing loved one.
    In addition, the legislation would create a tax deduction 
for the cost of long-term care insurance premiums. These tax 
benefits would help seniors pay for the high cost of long-term 
care insurance premiums and also provide incentives for younger 
people to begin investing in long-term care insurance.
    This legislation is a step in the right direction. I would 
like to thank both the witnesses for being here today and I 
look forward to hearing your testimony.
    The Chairman. Thank you, Senator Carnahan, and thank you 
for your cosponsorship of the legislation on the long-term care 
tax credit. I think that is very important. I have questions, 
and I know Senator Carnahan has questions, and we have a vote. 
So I think that what we will do is take a short recess if that 
is OK and come right back and get some discussion with you. The 
committee would be in recess. [Recess.]
    The committee will come to order. If everybody can take 
their seats, we will continue. Governor, let me ask you 
questions. I know you have to depart, and thank you very much 
for your patience. I like your testimony up till the time when 
you start talking about another commission. [Laughter.]
    I think from a congressional standpoint, commissions really 
reflect what Congress should be doing ourselves. I mean, 
commissions normally, you know, the concept is that they are 
going to make recommendations that Congress can accept. The 
experience with commissions, Social Security and Medicare, 
which I chaired, has really not been that good. I know we are 
looking for a way to solve this, and I appreciate that. You 
know, perhaps a commission is the right idea.
    Let me ask you another question, in Kentucky, maybe from 
your experiences. We are trying to say to the states that, 
look, long-term care is not just nursing homes. Nursing homes 
are good for people who need 24 hours a day, 7 day a week care. 
But many people in nursing homes, at least a significant number 
in nursing homes, really do not need to be there. Assisted 
living facilities or home health care or something short of 24 
hour a day, 7 day a week care would be sufficient to meet their 
needs.
    Has Kentucky utilized Medicaid waivers in order to use 
those funds for assisted living facilities or other type of 
care short of 24 hour/7 day a week care facility?
    Governor Patton. Yes, but let me address briefly the 
commission. We are looking for a way to elevate this issue to 
its appropriate place, and we recognize that it is going to 
have to be a partnership with the Congress. So the National 
Governors' Association wants to work with you to try to figure 
out how can we bring attention to this issue.
    Yes, Kentucky has a waiver on in-home care, but we find the 
need so great that, to be very frank, the only way we are able 
to contain the cost at all is just to limit the availability of 
service. Even with institutional care, through certificates of 
need, we do not allow nursing home beds to be built at a market 
demand because we know that they would be filled and Medicaid 
would be picking up a large part of that cost.
    With our home care waiver, we have a fixed number of 
waivers or the slots that are available, and when the slots are 
filled, then the next person does not get the service. That is 
the only way we can control the costs. If it were unlimited it 
is estimated that there are probably four times as many people 
that would meet a definition of real need than is what is being 
served.
    The Chairman. Do you remember what the reimbursement rate 
for Medicaid Federal/state in Kentucky happens to be? 70/30? 
65?
    Governor Patton. Kentucky's rate is 70/30, 30 percent 
state.
    The Chairman. 70/30. So if your costs in Medicaid have gone 
up by 47 percent, what are you attempting to do with the 
legislature to try and curtail, reduce those costs? How are you 
doing that?
    Governor Patton. Flexibility is the greatest thing that 
could happen to us to reduce costs. Now there is a limit to how 
much we could do, but Medicaid, as I understand it, is sort of 
one-size-fits-all. If you are going to provide some benefit, 
then you have to provide that benefit to all people that are 
eligible, and you cannot have a different copay for different 
income levels. I am getting a little deeper into this than I 
really know, but I know that if we could tailor our optional 
benefits a little bit more closely to fit some populations, it 
would make a tremendous difference.
    Over the last year, we have had some experts and we have 
done an awful lot of reducing the cost of our program. One of 
the things that we have done has been to become more efficient 
in transferring more of the cost to the Federal Government by 
finding more services than we have been providing that are, in 
fact, Medicaid eligible that we were paying 100 percent of the 
cost of.
    The Chairman. Yes.
    Governor Patton. But we have gone as far down that road as 
we can go.
    The Chairman. Well, you have done some great work in 
Kentucky, and we admire you for it. I appreciate your 
leadership in the National Governors' Association on this 
issue. I would really hope that what you said about elevating 
this issue to a level of national debate and national 
discussion really can be what we accomplish here.
    I think the NGA can be a major player in that. Maybe it is 
another commission. I do not reject it out of hand, but I 
think, you know, if we can work together on this with the NGA 
and the Congress, I think perhaps we can get some serious 
discussion. When I left here, a reporter asked me outside of 
the Senate chamber what are you all going to do about 
increasing health costs?
    I said, you know, we are not going to do anything this 
year; it is an election year. You know we are not going to make 
any real decisions of major importance on Medicaid or Medicare 
because no one wants to touch it, because it is such a volatile 
issue, and then we are going to say, well, we will do it next 
year. But next year never gets here, and that is the problem.
    But we appreciate your leadership. I urge you to continue 
providing it when you become chairman of the NGA. We look 
forward to working with you, and I understand you have to 
depart. So we appreciate your being with us and let you go.
    Governor Patton. Thank you, Mr. Chairman. We appreciate the 
opportunity.
    The Chairman. Thank you. Thank you very much, Governor 
Patton.
    Governor Patton. We do look forward to working with you in 
partnership.
    The Chairman. Yes, absolutely.
    Governor Patton. Thank you.
    The Chairman. With regard to some of the things that 
Governor Patton said, Mr. Walker, I become convinced that we 
operate health care in this country under the box theory. 
Senator Kerrey used to talk about this, that if you are a 
veteran, you are in the veteran's box at VA; if you are a poor 
American, you are in the Medicaid box; if you are a working 
American, you are in an employer-sponsored health insurance 
box; if you are an old American, you are in the Medicare box. 
Each one of those boxes has a complete bureaucracy that is set 
up to run it.
    Medicaid program, the Medicare program, the VA program, the 
employer's sponsored health insurance, ERISA box. It just seems 
to me that we as a nation ought to just provide health care for 
Americans and get out of the box system. What I am thinking 
about and what I have been working on with other members is a 
concept that the Federal Government should mandate health care 
insurance for all Americans, not an employer mandated system, 
but federally mandated requirement that every American have 
health insurance.
    Every state in the union requires every American before 
they drive a car or get a driver's license to have liability 
insurance. People have accepted that and they understand they 
have to do it, and there is no distinguishing difference 
between poor people or wealthy people. It is just a flat law. 
You have to have liability insurance or you cannot drive a car.
    We are thinking of the approach which would say that every 
American has to have a health insurance policy, and we will 
help buy it for poor people. It will be a graduated 
contribution to their premium. For poor people, we will pay 100 
percent of the premium. Then on a sliding scale up to the point 
where people can afford to pay for their own premium, perhaps 
with it being deductible on their income tax.
    We spend $300 billion a year on Medicare, $200 billion on 
Medicaid, billions of dollars on the VA program, billions of 
dollars on a tax credit for employer sponsored health insurance 
because it is deductible. We could take all of that money and 
use it to have a program that we would be subsidizing and 
requiring everybody to have health insurance.
     Do you have any thoughts about that type of concept? I 
know it is a long-term process, and it is not going to be done 
overnight, but if we do not start, we will never finish. Do you 
have any thoughts on that concept?
    Mr. Walker. Well, Senator, without specifically addressing 
the mandate per se, let me address some elements that I think 
that you touched on. I think what we have to recognize is we 
have a lot of silos right now. You talk about it in terms of 
boxes. I look at it in terms of silos. You know we have got, 
you know, Medicare. We have got VA. We have got DoD. We have 
got all these things, each with their own infrastructures, each 
with their own definitions of what is covered, and in many 
cases each with their own delivery mechanisms.
    I think we need to step back, and we need to say that what 
we have right now is fundamentally broken, it is unsustainable. 
If there is one thing that could bankrupt this country, it is 
health care costs. All right. Now that is not going to happen. 
We will not allow that to happen, but it is that serious.
    So I think we need to step back and we need to say, OK, 
what are fundamental needs, and how best can those needs be 
met? I would argue for your consideration that access to health 
care at group rates or, stated differently, guaranteed 
insurability; second, protection against financial ruin due to 
an unexpected catastrophic illness.
    All right. Now, financial ruin is different if you are a 
multi-millionaire than if you have very little; OK. 
Inoculations for children against infectious diseases. All 
right. So to try to define what are the basics, what are the 
basics that people need and it is in the national interest for 
them to have and how best to go about doing that.
    To the extent that people want more than that, then 
choices, options, and to the extent that they have resources, 
then obviously they ought to put some of their resources on the 
table to be able to make a more conscious choice about how much 
risk they want to lay off versus resources that they are 
willing to put to do that.
    I think you are right in saying you have got to put the tax 
preferences on the table. I think the tax preferences are part 
of the problem right now. I would suggest that it is 
appropriate right now for the employers to get a deduction, 
because if they do not get a deduction, then they will not 
offer health care coverage. They will just pay cash, and that 
could end up undercutting coverage.
    On the other hand, right now all individuals get an income 
tax exclusion for the value of health care, which further 
desensitizes them to the cost of health care, and so there are 
different ways, I think, you could go about it. But I think the 
idea that you need to step back, you need to reassess, we need 
to focus on, you know, what are the real needs, what is the 
appropriate role from the standpoint of the individual versus 
the employer versus the government, tax side as well as the 
benefit, is the only way to go, because right now we are on an 
unsustainable path and we are headed for a train wreck of 
massive proportions. While the states are ahead of us, because 
Medicaid is their biggest problem, that is our smallest 
problem.
    The Chairman. I mean you make a very good point. And most 
of the discussion in the Congress right now is not about 
reducing the amount we spend in this area. If anything, adding 
$750 billion prescription drug program to a Medicare program, 
we are going in exactly the opposite direction as far as not 
controlling costs. We are going to be adding to the 
government's responsibility unless we fix the program itself. 
Is that concern legitimate?
    Mr. Walker. Well, as you probably recall in your capacity 
as a member of the Senate Finance Committee, one of the things 
I testified a year ago was different levels of fiscal risk that 
we need to consider today: while there are things we can afford 
to do today, are we going to be able to sustain it tomorrow? 
The area I said represented the highest fiscal risk is 
increasing entitlement spending.
    Increasing entitlement spending when we already have a huge 
delta, or huge gap, between what is promised and what funding 
we have available for it right now, and the degree of 
difficulty in changing entitlement promises represents the 
highest risk I believe from a fiscal perspective.
    The Chairman. My final question is how much of a risk is it 
if we are going to have a $750 billion prescription drug 
program, and we just are going to pay for it out of Social 
Security surplus, which is what some have advocated? I mean 
what does that do to that system?
    Mr. Walker. Well, in the end, people will say, well, all we 
have to do is grow the economy more and we will solve our 
problem, but I think these charts, as you know, assume economic 
growth based on CBO assumptions which are not that far 
different than OMB. We are not going to grow ourselves out of 
this problem.
    We are going to have to end up starting to make some of 
these tough choices because Social Security might have a 
surplus today, but it is not going to have one in the not too 
distant future--2016, based on the latest Social Security 
trustees' estimates. Frankly, the trustees said when I was a 
trustee in 1992 that that program is unsustainable in its 
present form, but, guess what, it is the easiest thing to 
solve.
    Medicare and Medicaid are much tougher, and the reason 
being is in the case of Social Security I would respectfully 
suggest that you can restructure that program. You and I were 
on a commission together. There are different ways to do it. 
You can restructure that program in a way that you exceed the 
expectation of all generations of Americans, because current 
retirees can get what they are promised, near-term retirees 
can, and you can restructure it increasingly toward baby 
boomers, Xers, and Y. They are already discounting this program 
to a great extent, much greater than they should. So you can 
restructure it so you give everybody more than they think they 
are going to get, and also make it sustainable.
    But the problem is the subject of this hearing, which is 
long-term care, which is really not just health care. The 
Medicare and Medicaid, the imbalances are so huge, the 
expectation gaps are so great, that we are going to have to 
start making some of these tough choices. I mean the states are 
starting to do it. They are starting to cut back. In certain 
areas where they were discretionary, they are not required to 
provide.
    But it would be great if we could do it more 
comprehensively, which is what you are talking about, to step 
back and let us try to rationalize the whole system and try to 
make sense of it now rather than just incrementally just keep 
on chopping back to where we have got a worse situation years 
from now.
    The Chairman. Well, I could not agree with you more. I 
thank you very much. We have been joined by Senator Carper. 
Tom.
    Senator Carper. Mr. Chairman, as we listen to Mr. Walker 
talking about restructuring Social Security and all, this is, 
you know, the issue of notch babies. We have been dealing with 
that issue for as long as you and I have been here.
    The Chairman. Yes.
    Senator Carper. In a sense, we have a great opportunity to 
have a whole new generation of notch babies or those who 
perceive themselves to be that. Thanks for joining us today and 
thank you for the work you do and for the leadership that you 
provide. I apologize for not being here to hear your testimony, 
and I had a chance to visit with Governor Patton, my old 
colleague, and chatted a little bit in the halls, so I have 
some sense for what he was here to say.
    One of the things that would be helpful for me would just 
be to ask for you to take the next 5 minutes or so and lay out 
for me what you think our options are with respect to long-term 
care, and maybe some of the pluses and minuses of those 
options, and then if you have an option or a path forward that 
you think would be especially preferable, if you could share 
that with me.
    Mr. Walker. Well, let me give you an executive summary, 
Senator. First, I think we have to keep in mind that we face a 
very serious long-range fiscal challenge at the Federal level 
due primarily to known demographic trends and rising health 
care costs, Medicare, Medicaid being a subset of that, a major 
element of that.
    Second, long-term care, as you know, is not just health 
related. It is quality of life related. There are certain 
services that really do not have that much to do with a 
person's health. It is more a matter of daily living, assisted 
daily living, and certain of those types of things.
    Clearly one of the things that has to be recognized is we 
already have made more promises than we have funded, and the 
gaps are huge, and so we to have a division, try to come up 
with what is the appropriate division of responsibilities. How 
much should individuals personally be responsible? To what 
extent, through either tax preferences, through encouraging the 
insurance market, and through public education efforts, that 
you can get people to be doing things today that will help put 
them in a better position to be able to meet these needs in the 
future?
    To the extent that there are portions of the population, 
whether it be the disabled or the poor that might need special 
assistance, for them to target assistance into those areas of 
greatest need, but recognizing that, you know, we do not want 
to make promises that we cannot deliver on 10 years from now or 
15 years from now in doing that.
    So I think what I would commend to you, and I am happy to 
provide more details, if you would like, Senator, is on page 
two of the testimony, which we have entered into the record. 
Those are some of the key questions that I think, and I think 
part of it is defining what is long-term care, and what kind of 
services represent needs versus wants, because right now there 
are differences, there are significant differences, there are 
about five or six basic services that are normally included in 
there, but there are others that are sometimes included.
    I think the insurance market right now is not very strong, 
in part because the numbers are not there yet, but, you know, 
when baby boomers start retiring, I think the numbers will 
come, but I would say last that I think we have to recognize 
that long-term care is a subset of Medicaid. Medicaid is a 
subset of our health care challenge, and our health care 
challenge is a subset of the overall long-range challenge. So 
we have got to be careful not to try to solve this piece 
without understanding how it fits with the rest of the puzzle.
    That is why I think the idea of trying to look more 
comprehensively here is the way to go, because otherwise we are 
in danger of solving one problem but creating bigger problems 
in other areas, and I think that would be unfortunate if that 
is what happens.
    Senator Carper. All right. Good. Thank you very much.
    Mr. Walker. Thank you, Senator.
    The Chairman. Thank you, Senator Carper. Then the next 
hearing we are going to have is going to be on the use of tax 
credits to buy long-term health care insurance in more specific 
detail. But as a concept, I mean rather than just adding an 
ingredient into Medicare or Medicaid, if the government is 
going to pay for it again, can you comment on the concept of 
using the tax code to provide a tax credit for people to 
purchase long-term health care insurance?
    Mr. Walker. I think clearly from an intellectual 
standpoint, that is preferred than adding an entitlement that 
would end up being broad-based, if you will. I do, however, 
believe that one of the things that has to be a part of your 
comprehensive review that you are talking about is that 
Congress places a lot of time and attention focusing on direct 
spending programs, Medicare, Medicaid, et cetera.
    We do not spend enough time collectively in this country in 
looking at the revenue side, the tax preference side. Health 
care is either No. 1 or No. 2 on the tax preference. If it is 
not No. 1 yet, it will be very shortly, and I think that has to 
come under the microscope to figure out how that fits within 
this overall equation, because obviously if you give tax 
preferences, it helps on one hand, but it can end up hurting 
potentially with regard to the fiscal imbalance as well, and so 
that has got to be targeted as well I think.
    The Chairman. Yes. I appreciate it. Thank you, Mr. Walker. 
Always a pleasure to have you before the committee and look 
forward to continuing with our work with GAO. That will 
conclude this hearing.
    Mr. Walker. Thank you.
    [Whereupon, at 10:45 a.m., the committee was adjourned.]


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