[Senate Hearing 108-664]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-664

 MEDICAID IN CRISIS: COULD LONG TERM CARE PARTNERSHIPS BE PART OF THE 
                               SOLUTION?

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JUNE 22, 2004

                               __________

                           Serial No. 108-38

         Printed for the use of the Special Committee on Aging


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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska                  EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director

                                  (ii)




                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Larry Craig.........................     1

                                Panel I

Michael O'Grady, assistant secretary of planning and evaluation, 
  U.S. Department of Health and Human Services, Washington, DC...     3
Raymond Scheppach, executive director, National Governors 
  Association, Washington, DC....................................    15

                                Panel II

Mark Meiners, Ph.D., national program director, University of 
  Maryland Center on Aging, College Park, MD.....................    32
Melanie M. Bella, assistant secretary, Indiana Family and Social 
  Services Administration, Indianapolis, IN......................    41
Bob Bishop, long term care partnership insurance consumer, 
  Carmel, IN.....................................................    54
Kevin Corcoran, executive vice president, National Association of 
  Health Underwriters, Arlington, VA.............................    58
Steve Chies, chair, The American Health Care Association, 
  Cambridge, MN..................................................    71

                                 (iii)

  

 
 MEDICAID IN CRISIS: COULD LONG TERM CARE PARTNERSHIPS BE PART OF THE 
                               SOLUTION?

                              ----------                              --



                         TUESDAY, JUNE 22, 2004

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-628, Dirksen Senate Office Building, Hon. Larry Craig 
(chairman of the committee) presiding.
    Present: Senators Craig, Bayh, and Kohl.

       OPENING STATEMENT OF SENATOR LARRY CRAIG, CHAIRMAN

    The Chairman. Well, good morning, everyone. We are actually 
going to be a few minutes ahead of schedule this morning. That 
is rare in the U.S. Senate, but there are going to be a couple 
of votes at 10:45, so I thought we could get started and get 
through most of our testimony.
    Let me welcome you all to the U.S. Senate Special Committee 
on Aging. I would venture to say that Senator Bayh and I have a 
particular interest in today's hearing, as it deals directly 
with legislation that we have co-sponsored, and Senator Bayh 
will be joining us for the balance of the hearing, hopefully 
within a few moments.
    As you know, this hearing is on what we call the Medicaid 
crisis: could long-term care partnerships be part of a solution 
to that problem? For the past several years, Medicare has 
commanded most of Congress' health care attention. This is 
understandable but it is also to some degree--has obscured the 
equally important issue of long-term care. Experts estimate 
that four out of 10 people who reach the age of 65 will need 
long-term care at some point. The average cost of a 1-year stay 
in a nursing home today is about $66,000, and the average 
length of stay is about two and a half years.
    This often ruinous expense comes as a surprise to many 
seniors who mistakenly believe that nursing home care is 
covered under Medicare. As a result, many seniors find 
themselves in the tragic position of having to spend down their 
lifetime savings until they reach the poverty level to qualify 
for Medicaid. The Government, either State or Federal, now 
currently pays more than 60 percent of long-term care costs, 
but with the baby boom generation quickly aging, long-term care 
costs are expected to double by the year 2025 and nearly 
quadruple by 2050.
    Given these sobering demographics and the continuing budget 
pressures facing State governments, the present Medicaid 
documented funding approach to long-term care is simply 
unsustainable. To help address this difficult challenge, 
Senator Bayh and I have reintroduced the Long-Term Care 
Insurance Partnership Program Act of 2004. This legislation 
would allow Americans to purchase State-approved private long-
term care insurance policies and, in return, the State would 
guarantee that should the policy benefits be exhausted, the 
Government would cover the cost of their continuing care 
through Medicaid without first requiring a beneficiary to 
become impoverished.
    This legislation builds on partnership programs currently 
operated in four States: California, Connecticut, Indiana and 
New York. We are lucky enough to have representatives from 
Indiana here with us today to share their experiences. The bill 
would lift current Federal restrictions and make such programs 
available nationwide.
    Like over 15 other States, my own State of Idaho recently 
passed a joint memorial asking Congress to amend Federal law to 
allow States to enter into these innovative partnerships. I am 
extremely pleased that President Bush has also recognized the 
value of this approach and that the President has included it 
in his 1904 budget request to Congress.
    Enrollment in these policies is growing, and out of 150 
partnership policies currently in force in these four States, 
only about 86 policy holders to date have exhausted their long-
term care insurance benefits and been forced to return to 
Medicaid. Such long-term care partnership programs truly 
represent a win-win for all concerned, something rarely 
encountered in health care policy.
    For the individual, such partnership policies allows the 
person to feel secure that the money they saved for their 
golden years will not be quickly wiped out on their way to 
poverty. For States, such policies offer a way to relieve 
pressure on skyrocketing Medicaid expenditures. Long-term care 
partnership programs alone will not completely resolve the 
Medicaid crisis so many States face, but it is one innovative 
option that States can consider, and I certainly look forward 
to the testimony that we are about to receive.
    Senator Craig. Now, let me turn to those who have come to 
be with us this morning to testify. Our first panel is made up 
of Michael O'Grady, assistant secretary of Planning and 
Evaluation, Health and Human Services, here in Washington and 
Raymond Scheppach, executive director, National Governors 
Association here in Washington, DC also.
    So with that, Michael, let me turn to you first.

 STATEMENT OF MICHAEL O'GRADY, ASSISTANT SECRETARY OF PLANNING 
   AND EVALUATION, DEPARTMENT OF HEALTH AND HUMAN SERVICES, 
                         WASHINGTON, DC

    Mr. O' Grady. Good morning, Mr. Chairman.
    It is a pleasure to be here to discuss long-term care 
insurance, particularly the partnership program. There are at 
least three key benefits for individuals who purchase long-term 
care insurance: flexibility, the flexibility to stay in their 
own home, to go to an assisted living center or to go to a 
nursing home; choice, the choice of which providers they would 
like to use for their long-term care services; and control, 
control over how much and what kind of services they use.
    There are also clear benefits for the society as a whole. 
With the aging of the baby boom, Medicaid will be placed under 
significant financial pressure in the future. In 2004, total 
spending on long-term care for the elderly was $135 billion, 
and roughly a third of that was financed by the Medicaid 
program. By the year 2025, total spending is predicted to 
almost double to $260 billion, and by 2050, the population over 
age 65 is expected to double.
    There will be a compelling need to focus scarce Medicaid 
dollars on those who need it the most. Any measures that can 
increase the baby boomers' prefunding of their own long-term 
care will improve the situation significantly. Whether you are 
a proponent of using the public sector, the private sector or a 
combination of the two, policies that result in the boomers 
funding their own needs will greatly reduce the possibility of 
a crushing financial burden on their children and 
grandchildren.
    The administration has a number of initiatives to encourage 
purchase of long-term care insurance, including making long-
term care expenses deductible, an upcoming consumer awareness 
campaign. Long-term care, although the demographics underlining 
it are the same forces as we see in the Medicare crisis and in 
the Social Security crisis, it is, in effect, sort of a quiet 
stepchild. But the same forces are in effect; the same finances 
will be upcoming.
    The partnership program, we are certainly encouraging. What 
are partnerships? It is a program by which States can change 
their own Medicaid eligibility rules, their, quote, spend-down 
rules, and long-term care insurance does not count toward those 
calculations. Participants buy insurance that covers the cost 
of their own care. If they exhaust their long-term care 
insurance and need to go on Medicaid, they are allowed to keep 
additional assets equal to the value of their long-term care 
policy.
    This additional protection of assets increases the value of 
long-term care insurances for Americans, especially those of 
moderate income. Legislation is needed to give States the 
flexibility to introduce partnerships if they wish. Many States 
are anxious to do it; initially, 12 States passed legislation, 
but they are prevented by Federal Medicaid law from doing so. 
Only four of the 12, as you mentioned in your opening 
statement, California, Connecticut, Indiana and New York, moved 
quickly enough when partnerships were allowed to get their 
programs operational before the cutoff.
    OBRA 1993 prohibited the other States from moving ahead and 
cutoff the possibility of additional States starting programs. 
The four programs underway have continued, but the other States 
cannot start any new programs. The OBRA 1993 prohibitions 
reflect a concern that partnerships would be used to game the 
Medicaid program. A decade later, the data is in, and those 
concerns seem unwarranted. One hundred eighty thousand policies 
have been purchased in the four partnership States. Only 86 
individuals, or 0.05 percent, or five one-hundredth of a 
percent have actually gone on Medicaid.
    To summarize: long-term care insurance is an important tool 
in providing Americans with choice, flexibility and control 
during their last few years. It is an important tool in helping 
older Americans to stay in their own homes as long as possible. 
Partnership programs increase the value of long-term care 
insurance and make it more attractive to more people. The 
concerns about partnerships reflected in OBRA 1993 have not 
come to pass. Finally, anything that encourages the baby 
boomers to prefund their own long-term care reduces the 
financial burden on future generations and allows scarce 
Medicaid dollars to be focused on those with the greatest need.
    Thank you for your time.
    [The prepared statement of Mr. O'Grady follows:]

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    The Chairman. Michael, thank you very much.
    Now, let me turn to Raymond Scheppach, executive director, 
National Governors Association. Welcome to the Committee.

 STATEMENT OF RAYMOND SCHEPPACH, EXECUTIVE DIRECTOR, NATIONAL 
             GOVERNORS ASSOCIATION, WASHINGTON, DC

    Mr. Scheppach. Thank you, Mr. Chairman. I appreciate the 
opportunity to appear before you today on behalf of the 
nation's Governors to discuss the critical issue of long-term 
care.
    This morning, I would like to briefly cover three issues: 
first, the State fiscal challenges for Medicaid; second, the 
importance of your legislation, S. 2077; and also Governor 
Kempthorne's leadership on long-term care as NGA Chairman.
    After 3 years of the worst fiscal crisis in the last 60 
years, States are now witnessing relatively robust revenue 
growth. Regardless of the length and bullishness of the 
economic recovery, however, States will continue to confront 
very difficult long run budget decisions. Over 50 percent of a 
State's budget goes to education and Medicaid. Medicaid is a 
mandatory Federal entitlement whose growth rate is driven by 
rapidly changing demographics and rising costs, while education 
is primarily discretionary.
    Medicaid's growth is biasing State budget decisions and is 
winning the contest for State dollars. This will limit the 
States' ability to adequately fund education over the next 
decade. Medicaid currently represents about 21 percent of State 
budgets. It has grown over 11 percent per year over the last 25 
years. We were fortunate over the last 10 years, because during 
the boom period of 1995 to the year 2000, it went down 
considerably, but even there, the growth rate over the last 10 
years was over 8 percent. Unfortunately, over the last 3 years, 
it rebounded again to over 11 percent per year. This is in 
spite of the fact that every State cut reimbursement rates, cut 
eligible populations, cut benefits and instituted formularies.
    Elementary and secondary education represents 21 percent of 
State budgets and higher education another 11 percent. Over the 
last 3 years, when Medicaid growth again exploded, secondary 
education growth rate fell to 2.7 percent per year, and higher 
education fell to 1.5 percent. Unfortunately, over the next 
decade, it looks like a continuation of these recent growth 
rates.
    That means Medicaid rates continuing probably in the 8 to 
10 percent range and education probably in the 2 to 4 percent 
range. This is going to cause us a major problem, I suspect, 
now that we have an open economy. We need to compete on the 
international marketplace. To do that, we need to invest in the 
education and training of the work force.
    The bottom line, Mr. Chairman, is that Medicaid is trumping 
education in State budgets. With respect to long-term care 
insurance, in recent years, there has been growth in the 
availability of private long-term care insurance. Although the 
growth in this market has been slow, for those that have access 
and can afford such coverage, it is a reasonable alternative to 
public financing such as Medicaid.
    The insurance industry estimates that for every individual 
on long-term care insurance, the potential savings is about 
$5,000 for Medicaid. As indicated previously, there are four 
States that have partnerships, California, Connecticut, Indiana 
and New York. Currently about 140,000 of these remain in force. 
The four States that operate these programs are very pleased 
with their success, but Federal legislation currently restricts 
any further expansion.
    We strongly endorse your legislation, S. 2077. This is a 
win for older citizens who can stay in the community as well as 
a win for States in saving money and a win for the Federal 
Government in terms of saving money. As indicated previously, 
Governor Kempthorne chose as his Chairman's Initiative this 
year long-term care. In May, we brought together teams from 30 
States, teams of four to five State policy individuals for 2 
days in Chicago to talk about what innovations can take place 
to provide more long-term care. At the NGA annual meeting, we 
will be releasing in Seattle this summer a CD ROM related to 
four issue areas: promoting wellness and disease management, 
encouraging personal and financial planning, promoting 
community-based living and supporting family givers and in-home 
workers.
    We have also been working with the Department of Health and 
Human Services, who is funding an academy with us. This is 
where we bring together eight States for intensive technical 
assistance where they are supposed to develop their programs, 
go back, work with their legislatures and get them enacted. So 
I think States are taking a fair amount of leadership in this 
area.
    Your bill is obviously not a panacea. It is not a silver 
bullet, but it is a win-win situation. It is something that 
Congress should enact. I thank you, Mr. Chairman.
    [The prepared statement of Mr. Scheppach follows:]

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    The Chairman. Raymond, I thank you very much. I was 
extremely pleased that Governor Kempthorne would take that as 
his initiative. It kind of coincided. He is my Governor and 
also, of course, Chairman of the National Governors 
Association, and so, we see this as a team effort, as, of 
course, dealing with Medicaid and those who are eligible for it 
has always been at a State and Federal level.
    Before we go to questions, let me turn to my colleague, 
Senator Kohl, who has joined us.
    Herb, any opening comment?
    Senator Kohl. No.
    The Chairman. All right; well, then, let me start with 
questions.
    Mike, you mentioned some savings in budget neutrality. In 
your best estimate, how much could be saved with long-term care 
partnerships if we had them nationwide?
    Mr. O' Grady. It is a little hard to put a firm number 
exactly what it would do. What we do know is that by moving 
through partnerships, you are encouraging people to buy the 
long-term care insurance. As Ray pointed out, it is sort of one 
of the tools in the toolbox to help people prefund their own 
care.
    As I said before, we do have this demographic trend that is 
underlying where really the more you can get the baby boomers 
to use their own money rather than relying on future taxes or 
their own children's spending. So is there a firm number on 
exactly how many more there will be? I do not know of one. We 
can certainly look into it to try and find it. But it is 
certainly--this is an attempt to move in the right direction 
and to again, as was pointed out, to add one more tool that 
will allow people to prefund their own care.
    The Chairman. Ray, a similar question to you: you mentioned 
a $5,000 figure. Would you break that out? That is annualized 
per patient?
    Mr. Scheppach. I think that it is a total number for 
Medicaid.
    The Chairman. Total?
    Mr. Scheppach. That is right. That is from the insurance 
industry. I do know that the State people think that they are 
saving money on all four of the particular programs right now.
    The Chairman. But the States involved have not done an 
analysis as to what their average savings per individual is 
under their current policy?
    Mr. Scheppach. I do not think they have good numbers. The 
individual from Indiana is here later. She may want to address 
that. I know they have done a number of surveys, however. So, I 
mean, I think they have a sense of it.
    The other point I would like to make, though, is that this 
is an insurance that is not widely available in most places.
    The Chairman. Exactly.
    Mr. Scheppach. So I think by expanding it, it will probably 
become more efficient, and perhaps the cost savings will be 
even larger.
    The Chairman. Well, that was going to be my next question, 
and I can ask it of both of you: if long-term care partnership 
legislation of the type that Evan and I have here passes, will 
the insurance industry from your experience be willing to work 
with the States to offer suitable policies, and how can we 
assure that these policies offer enough coverage? A combination 
of will they offer it, and do you think the industry will step 
up if this opportunity exists, and will there be enough 
coverage?
    Mr. O' Grady. I would say that in terms of will they step 
up, yes. I think that they will. What we have seen in other 
forums where we have moved into offering and allowing new 
insurance products to be offered, and there is a demand for 
them, they certainly move up. Their competitive instinct is to 
make sure that they move up before one of their competitors 
moves up and takes that market share.
    Is there still work to do for them to try and think about 
how to be as innovation as possible, to make this as attractive 
to people? I think so. There is still room for improvement 
there, and how you might make it so that it really does fit the 
needs of particular subpopulations of the elderly.
    The Chairman. Sure.
    Ray.
    Mr. Scheppach. I also think they will step up. The other 
thing, of course, that is going on in States, that a lot of 
States are requiring now that this be an option for state 
employees in terms of their health care benefits, and I think 
the Federal Government has recently done that as well. So I 
think some of these other things will get the spotlight more on 
it. It will increase the awareness of individuals and develop a 
more sophisticated insurance market at lower costs.
    The Chairman. Mike, you mentioned that of course, the 
legislation or the partnerships in long-term care are only a 
part of the solution. What else needs to be done?
    Mr. O' Grady. Well, there are a number of other things 
that, you know, this falls into a general category of trying to 
increase the savings rate, especially among the boomers who are 
now at their peak earning period. So you want them to be able 
to save, and we look at international comparisons of American 
savings rates to others; there is certainly an indication from 
the pension world, certainly from other aspects of retiree 
health insurance that there is a need to save at higher rates 
than we currently do.
    So part of the other tools you might bring to bear are 
certainly how long-term care expenses are treated in terms of 
tax deductibility, how they are treated there to encourage. Are 
there other things that could be done? Certainly. There are 
other forms of annuities; there are other forms of savings, and 
Congress may consider whether--how tax advantaged or otherwise. 
That is certainly as we have done certain other areas. Like, I 
used to work for Senator Roth in the Finance Committee. 
Certainly, when we saw the Roth IRA come in, and you see that 
attempt to get new savings, not just people shifting from 
something with a little more tax advantage than they had before 
but really getting people to save more, and that is the general 
area that we are talking about.
    Some of the other tools that might be brought to bear are--
we are looking at home conversion. People hold an awful lot of 
equity in their homes. If they spend down to Medicaid, some of 
that equity will be eventually taken by the State after they 
die.
    Are there other ways that they could use their home equity 
to stay in their own home longer and be able to do that in a 
way that both meets all the concerns of Congress and the 
Administration but at the same time keeps elderly Americans in 
their homes as long as they possibly want to?
    The Chairman. Ray, any comment in that area?
    Mr. Scheppach. Yes, a lot of it is public awareness, I 
think, and that is one of the areas where I think States are 
beginning to step up more, and also private sector financial 
counseling; it needs to be part of that. I do think tax 
treatment, whether it is tax credits or deductibility is a 
possibility. Including it with other types of insurance, 
whether it is life insurance, annuities, other health insurance 
so that people get used to it being part of a general insurance 
package.
    The Chairman. We have just been joined by my partner in 
this legislation, the Senator from Indiana, Evan Bayh, and 
Evan, do you have any opening comment you would like to make? 
Then, we will go back to Herb for questions if he has any and 
return to you? We are running up against a 10:45 two-stacked 
votes, so I thought we would run into that vote until we are 
right at the tail end of it, and then, we will probably recess 
and jog over and make the first and the last vote and get back 
here for our second panel.
    Please proceed.
    Senator Bayh. That being the case, Mr. Chairman, I would 
defer to the panel. I would just say thank you for your 
leadership in holding this hearing. It is a pleasure to work 
with you and Senator Kohl on this issue. It is good to see Mr. 
Scheppach again. As a matter of fact, our State began this--we 
are one of the four States, as you know, that is fortunate to 
have been able to experiment with this effort and began it in 
1991 in a previous incarnation of mine when I was Governor of 
our State.
    The Chairman. I was going to say, this was done on your 
watch, was it not, or did it start before----
    Senator Bayh. The enabling legislation was enacted in 1987. 
The program was instituted in 1991, when I was Governor of our 
State, Larry.
    So I just thank you for your leadership and our panelists. 
We have two----
    The Chairman. Yes.
    Senator Bayh [continuing]. Panelists coming up who are from 
Indiana, so obviously, I look forward to introducing them. I 
thank Senator Kohl for his forbearance.
    The Chairman. Herb? Senator Kohl?
    Senator Kohl. I thank you, Mr. Chairman, and I am pleased 
that you are holding this hearing today.
    With the retirement of the baby boom generation within 
sight, it is past time that Congress and the administration 
take a serious look at the holes in our long-term care system. 
More and more Americans will need care in nursing homes, 
assisted living facilities and home health care. Yet, too few 
Americans have planned for these costs, and Government programs 
alone, as we know, cannot be the answer.
    So we need to look at a variety of ways to encourage people 
to plan for their future health care needs. This hearing 
focuses on long-term care partnerships as one potential 
solution, and it seems clear that they could be of some help to 
people. It is a good idea and one worth considering. However, 
as this legislation moves forward, I think we need to take a 
careful look at total asset policies and make sure that they do 
not allow wealthier people to use partnerships to 
inappropriately shield their assets to qualify for Medicaid.
    Medicaid, as we all know already, faces huge financial 
challenges, and I think we would all agree that we need to be 
very careful not to add unnecessarily to that strain. It is 
clear that partnerships could be one part of the solution for 
long-term care, and I commend the Chairman and Senator Bayh for 
bringing this proposal before the Committee.
    We all know that partnerships alone cannot solve our 
nation's long-term care challenges. At best, this would be just 
one small part of trying to address the problem. I appreciate 
the fact that both of you have suggested that there are other 
ways in which we need to move if we indeed are going to take a 
comprehensive look at the problems of long-term care, and so, I 
was going to ask you to talk about some of those other ways, 
and you have mentioned some already, but I just want to 
emphasize, and I am sure that Senator Craig and Senator Bayh 
would agree that long-term care partnerships in and of 
themselves, while good, certainly do not fully address the 
needs of long-term care in our society today.
    Would you agree with that, Mr. O'Grady?
    Mr. O' Grady. Yes, I would, and when we think about this 
population, and we think about how to help them prepare as much 
as possible, I think that one of the things about partnerships 
is they help you focus on those moderate income folks, the kind 
of person who maybe made $40,000 or $50,000 a year when they 
were working; now, they are making maybe $20,000 in retirement, 
and if they are hit with one of these $60,000 a year nursing 
home bills, they are going to fairly quickly spend down into 
Medicaid.
    Lower-income folks, they are not holding these kind of 
assets. They are Medicaid, and in the thinking of how you 
target Medicaid dollars, those are the folks that Medicaid is 
really designed for, to give them the sort of safety net and 
protections. Higher-income folks who have a lot of assets, they 
are probably, you know, they are going to in effect self-fund.
    Now, if they would like to buy insurance to cover that, 
that is great, and you want them to have the opportunity. But 
when we think about these different measures, kind of the key 
target population to a certain degree is that moderate income 
guy who, when we think of Medicaid and who they serve, long-
term care is the one sort of spike where the program really 
spends up into the moderate income group when we think about 
the, you know, TANF population or other people like that who 
are linked with Medicaid.
    So this is the one area where we are really moving into 
moderate income folks, and as I said before, there is this 
demographics of the baby boom going on so that if there is any 
way to get that generation to do some prefunding, it is just 
going to make things so much better than whatever their 
children and grandchildren face, either through public programs 
or private funding that they might have to pay.
    So you want to figure out any way you can get any tool in 
the toolbox to get this generation to finance their own, not 
put it on their children and grandchildren.
    Senator Kohl. I think that is good.
    Thank you, Mr. Chairman.
    The Chairman. Well, thank you.
    Ray, one last question of you, and then, we will get to our 
second panel, and I think we can gain testimony from them 
before we need to break to vote. Reports suggest that estate 
recovery programs in the States are not the most cost-effective 
way of offsetting the cost of Medicaid. Why are States not more 
aggressive in their estate recovery efforts?
    Mr. Scheppach. Well, first, you have a whole, large 
sophisticated industry out there that is working to shelter 
individuals' income, and so, that is the first problem. The 
other problem is that the politics around this issue are tough, 
so even if a Governor oftentimes wants to introduce legislation 
in his legislature, it is very difficult to get it passed. So 
you are up against some pretty serious obstacles.
    The Chairman. Well, gentlemen, thank you very much.
    Senator Bayh. Mr. Chairman, can I just ask----
    The Chairman. Please.
    Senator Bayh [continuing.] Just a quick question of Mr. 
O'Grady.
    The Chairman. Of course.
    Senator Bayh. I understand the issue of cost has been 
raised, and we are working with the different scoring agencies 
to try to get them to take a more global view. My colleague, 
Senator Kohl, did raise the issue of the potential for wealthy 
individuals perhaps shielding assets and getting on Medicaid, 
which initially has some intuitive sense to it.
    I would like your opinion, though, about the possibility of 
wealthy individuals seeking their health care from Medicaid 
providers. At least in my experience, it is unfortunate; many 
providers do not opt into the Medicaid system, but it is a 
fact, and most wealthy individuals, at least in my experience, 
those are not the providers they go to. So it seems while it is 
a risk that I think we need to protect against, I think that it 
is unlikely that Bill Gates or someone like that is going to be 
going to an urban hospital to get health care.
    Mr. O' Grady. Right, and when we think of that side of the 
physicians that they might go to, the specialists they might go 
to, most of these folks are going to be covered by Medicare, 
and that will be their aside. When we are thinking about where 
a wealthier individual might be in a position to spend down is 
more in a nursing home setting, where nursing homes do have a 
mix of Medicaid and private pay. If they have too many 
Medicaid, they are in financial difficulty and how you sort of 
blend that.
    The one sort of real advantage that you have got here in 
moving forward on your bill, though, is that we are always, as 
we face these new challenges, we are always sort of stuck with, 
well, how do we think this is going to really work? You know, 
is it time for a demo or a pilot? Well, in effect, you have got 
10 years.
    The Chairman. You have done it.
    Mr. O' Grady. You have done it. You have got four States. 
They are diverse States. You have got it. We see--I think it 
was 86 or 89 people actually over a decade have actually spent 
down and triggered Medicaid.
    Senator Bayh. Governors have been arguing for this kind of 
flexibility for years.
    Mr. O' Grady. Right, and you have got the reassurance of a 
track record here. So, you know, we are always looking to be 
breakthrough and innovative, but then, you know, the CBOs of 
the world say show me the data. It is little hard to be 
innovative and have an experience to show, but you have a win-
win here in terms of it has got a proven track record.
    Senator Bayh. Two other quick things.
    Mr. O' Grady. Sure.
    Senator Bayh. Just one on the cost front. I think one of 
our Indiana experts is going to offer her assessment of our 
experience, but as Mr. Scheppach was mentioning, Mr. Chairman, 
there is a whole industry that has arisen about asset transfers 
so that rather than--people engage in all sorts of financial 
machinations to qualify for Medicaid by transferring their 
assets here and there, and I believe that she may testify that 
it has been up to 15 percent has been our experience, that 
these kinds of policies will avoid that kind of behavior and 
thereby save Medicaid money, because individuals will be taking 
responsibility for themselves as opposed to engaging in this 
sort of financial engineering to qualify for Medicaid.
    Just one other point that I think needs to be--as we assess 
the cost, that needs to be factored in as well, and I think she 
is also going to testify about the savings per year that accrue 
from every year delayed, which certainly ought to be taken into 
account.
    My last question, and then, let us get on to the next 
panel: do you have an opinion, either one of you, about the 
dollar-for-dollar coverage versus total asset coverage? Do you 
have an opinion about the advisability of one versus the other?
    Mr. O' Grady. The data that we have seen on that, I mean, 
it seems to me that there were certain concerns when New York 
first went to sort of a larger----
    Senator Bayh. I think this gets to Senator Kohl's concern.
    Mr. O' Grady. Yes, I mean, we have not seen the sort of 
concerns come out that this somehow is going to mean, in that 
State anyway, higher income people really sheltering large 
amounts of assets.
    Senator Bayh. Congressman Waxman had concerns about this 
back in 1993.
    Mr. O' Grady. Right.
    Senator Bayh. Which is one of the reasons the program was 
just limited to only four.
    The Chairman. Right.
    Mr. O' Grady. Right, and that is the idea of you look at 
the design, and you have concerns, the advantage again that you 
have is that we have 10 years of experience, and those concerns 
have not proven out. So you have got some confidence there you 
can move forward without it blowing up on you later.
    Senator Bayh. Thank you, Mr. Chairman.
    The Chairman. Gentlemen, thank you very much for being with 
us this morning and offering your testimony. We appreciate it. 
We appreciate the partnership that we have got going here on 
this legislation. We will continue to with you. We need your 
Governors out there tromping the turf to convince our 
colleagues her that this is the right direction to go in, Ray.
    Mr. Scheppach. Right, we will be there.
    The Chairman. All right; thank you very much.
    The Chairman. Now, let me ask our second panel to come 
forward this morning if they would, please.
    Evan, if you would, I will let you start and introduce your 
two home State folks who are here, and then, I will introduce 
the balance of the panel, and then, we will start with the 
testimony.
    Senator Bayh. Thank you very much, Mr. Chairman.
    I am honored and pleased to have two Hoosiers with us today 
who I can introduce. I want to welcome them both. Why do I not 
start with Melanie Bella, who is the director of our State 
Medicaid program with an annual operating budget, Mr. Chairman, 
of over $4.2 billion, and it serves over 800,000 low-income and 
disabled Hoosiers. That is about one out of every seven 
citizens in our State.
    During my years as Governor, Mr. Chairman, I spent as much 
time in the Medicaid program as anything else trying to strike 
the right balance between what the taxpayers could afford and 
quality, affordable health care for the indigent and disabled 
who needed it, and Ms. Bella has done an outstanding job of 
striking that right balance.
    She has a number of honors and awards from national 
organizations. I will not go through them all but just touch 
briefly upon the Visionary Award that she received from the 
Robert Wood Johnson Foundation's Office of Improving Chronic 
Illness Care. She has also been selected to join the National 
Academy of State Health Policy and was elected to the Executive 
Committee of the National Association of State Medicaid 
Directors as the Midwest regional representative.
    Before serving as the Medicaid director, Ms. Bella was a 
senior vice-president for Netgov.com, director of operations 
and strategy for the Indiana University School of Medicine, one 
of the largest schools of medicine in the country, Mr. 
Chairman, and director of health policy for the Health and 
Hospital Corporation of Marion County, IN, which deals with a 
very significant Medicaid population.
    She received her undergraduate degree from DePauw 
University and her master's of business administration from an 
institution in Boston, Harvard University. So we welcome Ms. 
Bella today, and Melanie, I want to thank you today for the 
wonderful job you are doing on behalf of the people of our 
State. We look forward to hearing your testimony today.
    Also with us today is Bob Bishop from Carmel, IN. Bob, I 
cannot tell you how often people from other States tell me they 
have friends in Carmel, IN, but as you and I both know, it is 
Carmel. So I welcome you.
    Bob is 70 years old, married with five grown children and 
nine grandchildren. What a blessing. He purchased plans for 
himself and his wife. He purchased dollar-for-dollar coverage 
for himself and total asset protection for his wife. I believe 
he is going to refer to the partnership as a blessing and 
believes it would be devastating for someone to work their 
entire life, successfully raise a family, then retire only to 
have all of their assets placed in jeopardy because of health 
care circumstances beyond their control.
    So, Bob, you are going to put a human face on this today 
with your personal experience, and I want to thank you for 
taking the time and trouble to journey here to the nation's 
capital. So I welcome both you and Melanie and look forward to 
hearing from you both.
    Mr. Chairman.
    The Chairman. Evan, thank you very much, and I must say, 
Melanie, we are glad to have an expert, if you will, assisting 
us as we work this legislation.
    Let me introduce the balance of our panelists: Mark 
Meiners, national program director, University of Maryland 
Center on Aging in College Park. Mark, we appreciate your 
presence here. Kevin Corcoran, National Association of Health 
Underwriters in Arlington; and Steve Chies?
    Mr. Chies. Chies.
    The Chairman. Chies, chair of the American Health Care 
Association in Cambridge.
    Now, Mark, we will start with you and move through our 
panelists. Please proceed.

 STATEMENT OF MARK MEINERS, PH.D., NATIONAL PROGRAM DIRECTOR, 
    UNIVERSITY OF MARYLAND CENTER ON AGING, COLLEGE PARK, MD

    Mr. Meiners. Mr. Chairman, Senator Bayh, it is a pleasure 
to be here. My history with long-term care insurance goes quite 
a ways back, 1979, I was a young researcher with the Department 
of Health and Human Services and begun----
    The Chairman. Pull that microphone just a bit closer.
    Mr. Meiners. Sorry. I began a research agenda on long-term 
care insurance, because there was none. So we explored whether 
there was market failure and why there was market failure and 
discovered some ways that we could develop products. So, by the 
mid eighties, some of this research had really led to the 
insurance industry taking it seriously, looking at getting 
products to the market. My next phase in this was to try to 
figure out a way to really make sure that the product was there 
for the middle and modest income people that we have talked 
about already this morning so that we could really help people 
avoid spend-down.
    That is what led to the partnership program. The Robert 
Wood Johnson Foundation supported us at Maryland to do a 
multistate initiative that ultimately ended up in these four 
States that we are now talking about today having existing 
programs, and Senator Bayh, I remember when we kicked the 
program off, the press conference, we were there, and it was a 
great time.
    I am now here to----
    Senator Bayh. Seems like ancient history.
    Mr. Meiners. It does; well, it was 1991, so it has been 
awhile back.
    But now, it is the time to take that next step. We need 
your help, and I really appreciate this legislation to overturn 
the OBRA restrictions. I said in my testimony to really kind of 
close it off is saying that this is really a no-brainer. I do 
not mean to offend anybody by that, but in a sense, we have 
struggled with this issue, and I think the partnership is a way 
to balance sort of the countervailing points of view on long-
term care insurance. It really gives States a way to step up 
and provide middle and modest income people an opportunity to 
avoid impoverishment and to avoid the temptation to game the 
Medicaid system.
    So it does the things that we really want long-term care 
insurance to do but does it for the right people, and I think 
that is very important. It also, I think, one of the things 
that we sometimes lose sight of is that it will help create an 
atmosphere where agents in the communities can really step up 
and expose a broad spectrum of their citizens to this insurance 
risk with the idea that there is actually something to be done 
about it, and that cannot be emphasized enough.
    Right now, I think long-term care insurance is often viewed 
as a niche product for the well-to-do. This is a way to make 
sure that any time an agent walks through the door with their 
portfolio of insurance, they can expose people to long-term 
care insurance as well, because they have a way to help people 
think about it even though they may not have a lot of income 
and assets; they have enough to afford something. That is very 
important. It changes the mindset.
    In terms of arguments for the partnership, I think research 
are a couple of things that really speak to why I think it is a 
no-brainer. First of all, in the scheme of how you might 
subsidize this insurance, we talk about pre-tax benefits, and I 
certainly would support those. But I also think that when you 
budget those out in times of budget deficits, it is very 
difficult to not think about the costs of those pre-tax dollars 
in supporting such a market.
    This is a very efficient subsidy. It only kicks in once 
somebody has on their own purchased the product and then gone 
through that product, and it is only at that point that 
Medicaid is at all at risk of having to pay some of the 
benefit. It is an incentive to get more people to enter the 
market.
    We have used that mindset to do some simulations in 
launching this program, so in answer to the questions that you 
have about cost-effectiveness, our simulations suggest that by 
the year when we reach a steady State in the year of 2020 that 
one could expect as much as a 7 percent savings in Medicaid 
budget. Even though we were really going for a budget-neutral 
kind of world, that potential does exist, for the reasons I 
said: it brings more people into the market who otherwise would 
not be there, and in fact, it creates a situation where people 
who might game the system do not game the system.
    The other side of it is where I would argue it is a no-
brainer is because I think it really helps mitigate some of the 
concerns Congressman Waxman had about erosion of support for 
Medicaid. I think we need to support Medicaid. There are many 
people whom Medicaid must serve, but it should not be the 
middle class. This is a way to create a situation where even 
though we are encouraging people not to use Medicaid, we are 
supporting Medicaid in the sense that you have a constituency 
out there that should their circumstances change that they 
would want Medicaid to be as good as it can be at the time they 
need it.
    For them, can be supported by the fact that they would have 
assets to help support their care in addition to the support 
from Medicaid. So I think it really balances a number of very 
strong countervailing interests and does so in a way that 
supports middle and modest income to really be a part of this 
market.
    We have had, I think, a lot of success getting these 
products off the ground. I think there is much more success to 
come once more States are on board. That is the key of 
overturning OBRA. We need to make this not just a niche market, 
which it will remain if it is only in these four States.
    I will be happy to answer the kinds of questions you were 
asking the other panelists before.
    [The prepared statement of Mr. Meiners follows:]

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    The Chairman. Mark, thank you very much.
    Melanie, please?

  STATEMENT OF MELANIE M. BELLA, ASSISTANT SECRETARY, INDIANA 
  FAMILY AND SOCIAL SERVICES ADMINISTRATION, INDIANAPOLIS, IN

    Ms. Bella. Mr. Chairman, thank you for the chance to be 
here today. Special thank you to Senator Bayh, because without 
his leadership, we would not be here.
    On behalf of Governor Kernan, I feel fortunate to represent 
Indiana as one of the four partnership States and share with 
you a little bit about our experience. Just to give you 
context, in Indiana Medicaid, we are spending close to $788 
million to $800 million on nursing home care alone. In any 
given year, it ranges from 18 to 20 percent of our budget.
    As we look at the aging of our population and project, that 
demand is going to increase. It is not sustainable for our 
State Medicaid program, as we are paying for two out of every 
three Nursing home beds today as it is. So we are very much in 
favor of expanding the long-term care partnership program to 
help promote the market as a whole.
    For Indiana, it allows us to provide important incentives 
for purchasing long-term care insurance. It allows us to reward 
Hoosiers who plan ahead, and it provides us with critical 
assistance to manage the Medicaid budget. In Indiana, we have 
sold over 30,000 policies. We have about 26,000 actively in 
force today, and I will talk to you a little bit about who 
those folks are in just a minute.
    I want to talk about three key features that the 
partnership program has. One is asset protection. Indiana is 
the only State to have both total asset protection and dollar-
for-dollar asset protection. So policy holders can choose if 
they want to purchase a policy that allows them to protect all 
of their assets or if they would like to purchase a policy that 
protects dollar-for-dollar.
    Again, that gives our policy holders an important choice 
where they can figure out what preplanning is best for their 
situation. Seventy-five percent of our policyholders have the 
total asset protection, so that is an attractive incentive for 
them. The asset protection is most important, from my 
perspective in running the Medicaid program, because it gives 
us a very viable alternative to the Medicaid estate planning 
and asset sheltering that has been referred to.
    There is a growing market of attorneys and financial 
planners who manage to find very creative ways to shelter 
assets and create loopholes to get on Medicaid early. We like 
to joke it is kind of like the whack a mole game. As soon as we 
close a loophole, another one pops up. We are constantly 
chasing ourselves to keep closing those loopholes. There are 
creative people out there. By having the partnership program, 
we are able to say to legislators and the Governor and others 
who take quite a bit of pressure for some of these initiatives 
we are trying to do that we have a viable alternative that 
allows people to shelter their assets from Medicaid in a way 
that benefits them as well as the State. So it is a very 
powerful tool to help us get the legislative support that we 
need to close more and more of those loopholes.
    The second feature that I want to talk about is the 
reciprocity feature. Within the partnership program, Indiana 
and Connecticut have reciprocity, meaning that with the asset 
protection feature, someone who purchases in Indiana can have 
their assets protected from Medicaid in Connecticut.
    The bill that we are talking about today would really help 
us, because we do not have very many people retiring between 
Indiana and Connecticut, and so, the more States that are part 
of this program, the more attractive it is, especially as we 
try to get younger policyholders to purchase, because they do 
not know where they are going to retire. So giving them the 
opportunity to know that the reciprocity is going to exist in 
more than two States would be very valuable to continue to 
assist us.
    The third feature that we have been asked about is there a 
tax benefit for this? There is a State tax deduction in 
Indiana. Also, as you know, there are Federal tax deductions 
for the federally qualified policies.
    I want to spend just a minute talking to you about who the 
people are on our program and get to the question of is this a 
good incentive, is this really good for Medicaid programs? Of 
the 26,000 people that I told you about who have an active 
policy in force, we have 187 people who are in their benefit 
period or who have used a benefit at any given time. Fifty-two 
of those people have passed away. So of those who are 
remaining, 13 people, that is 0.004 percent, have actually 
exhausted their benefits and are in an asset sheltering period.
    So when you look at the average length of time for a policy 
translates into about 4 years when people are purchasing their 
coverage period. The average length of time in a nursing home 
is about 2\1/2\ years. Generally, people are not exhausting 
their benefit before they would go into the asset shelter 
period. So from our perspective, it does strengthen the 
Medicaid program and does not end up costing more than it would 
by offering that asset protection.
    So in closing, just to reiterate, Medicaid cannot be the 
payer of last resort for the lower and upper middle class. We 
have got to offer them viable alternatives to plan, and this is 
a tremendous tool for States, and we would very much encourage 
your expansion.
    Thank you.
    [The prepared statement of Ms. Bella follows:]

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    The Chairman. Thank you very much for that very 
enlightening testimony.
    Bob, now, let us turn to you and find out why.

    STATEMENT OF ROBERT BISHOP, LONG TERM CARE PARTNERSHIP 
                 INSURANCE CONSUMER, CARMEL, IN

    Mr. Bishop. Thank you, Mr. Chairman and thank you, Senator 
Bayh, for your words of introduction.
    The Chairman. Please pull your mike a little closer if you 
would, please.
    Mr. Bishop. Sure.
    My name is Robert Bishop. I reside with my wife in Carmel, 
IN, and except for 2 years while on rotational assignment have 
always lived in Indiana. My wife and I have five grown 
children, all of whom are gainfully employed. We have nine 
grandchildren, and both my wife and I are 70 years old.
    Until my retirement in early 1991, I was employed for 39 
years by the Indiana Bell Telephone Company, which was, at that 
time, part of Ameritech. Most of my career, I was involved in 
network planning, where we planned and conducted economic 
comparison studies dealing in large part with the timing and 
economic feasibility of introducing new technologies into the 
telephone network. Long-term care insurance was not a priority 
item with me until I attended a broker-client meeting in, I 
believe, the year 2000, where Indiana's partnership program was 
explained.
    The meeting awakened me to the substantial risk I was 
exposing my estate to and to the potential hardship, both 
economic and emotional, I was placing in the path of my family 
by not owning long-term care insurance. This realization, along 
with the knowledge that I could permanently protect some of my 
assets under the partnership plan caused me to purchase a 
limited amount of insurance and to take advantage of this 
protection.
    Anticipating my wife would outlive me and probably live 
well into her eighties as her mother and grandmother did, I 
chose to buy a larger amount of insurance for her which 
qualified for the 100 percent plan. Due to cash-flow 
constraints, I purchased a lesser amount of insurance for 
myself, qualifying me for dollar-for-dollar asset protection.
    Insurance premiums for long-term care are not 
insignificant, particularly when you wait as long as I did to 
purchase it. Consequently, I feel that I am somewhat 
underinsured. However, whenever a major purchase is being 
considered, one must weigh many factors, including present and 
future cash-flow constraints, probable future inflation rates, 
and in this case, the stability and long-term prospects of the 
insurance company itself.
    When on a fixed income, these considerations become even 
more critical. On the other hand, had I moved ahead years 
earlier while still working, I would not have been able to 
benefit from the partnership plan. This is because Indiana's 
program did not go into effect until, I believe, 1993.
    While the existence of the partnership plan was not in and 
of itself the reason I purchased the insurance, it certainly 
was a very significant motivator. The partnership plan is 
indeed a blessing. To me, it would be devastating and 
shattering for a person to work his entire life, successfully 
raise a family, then retire with the notion that he can live 
out his days using the proceeds from an accumulated nest egg 
only to die in poverty because of circumstances brought about 
by situations completely beyond his control.
    I do not want that to happen to me or my wife. I do not 
want to lose that sense of pride and accomplishment that one 
has when he has run a good race.
    Thank you for the opportunity of appearing before you this 
morning. I would be happy to take any questions you may have.
    [The prepared statement of Mr. Bishop follows:]

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    The Chairman. Well, Bob, thank you very much for that 
testimony and that kind of presentation of reality. We 
appreciate that.
    Kevin, now we will turn to you. Please proceed.

STATEMENT OF KEVIN CORCORAN, EXECUTIVE VICE PRESIDENT, NATIONAL 
       ASSOCIATION OF HEALTH UNDERWRITERS, ARLINGTON, VA

    Mr. Corcoran. Good morning, Mr. Chairman, Senator Bayh.
    My name is Kevin Corcoran. I am the executive vice-
president of the National Association of Health Underwriters. 
NAHU is an association of almost 20,000 health insurance 
professionals involved in the sale and service of health 
insurance, long-term care insurance and related products, 
serving the insurance needs of over 100 million Americans.
    We believe long-term care partnership programs can serve an 
important role in encouraging Americans to plan for their long-
term care needs by addressing affordability, which is the most 
basic component of access to any type of health care.
    As Chairman Craig addressed in his opening remarks, the 
challenges facing Medicare are significant. In the year 2020, 
one in six Americans will be 65 years or older; the number of 
people in nursing homes will begin to mushroom as the baby 
boomers reach age 75. Nursing home costs currently run over 
$66,000 annually, and this will continue to increase. Eight out 
of 10 people in America are not insured for this type of 
catastrophic expense, and as a result, Medicaid has become the 
primary payer for long-term care expenses.
    Medicaid now pays an amazing 60 percent of long-term care 
expenses for people nationwide, either for people who are poor 
or for those who have spent down their assets in order to 
qualify for Medicaid.
    As we all know, most States are experiencing significant 
budgetary problems, and Medicaid is one of their biggest 
expense items. Currently, costs for long-term care consume 
almost two-thirds of most State Medicaid budgets. It is 
imperative that we do something now to encourage consumers to 
plan for this expense, as they do other expenses, and that we 
create reasonable incentives for them to do so.
    Long-term care partnership programs can do just that. Under 
a partnership policy, if a policy holder exhausts the benefits 
provided by their long-term care insurance, Medicaid will pay 
for their long-term care expenses. But rather than being 
required to spend down all of their assets to qualify, the 
policy holder can keep personal assets equal to the benefits 
paid by the policy.
    States with partnership programs are projected to realize 
savings, since their treasuries will be the last payer for care 
and the not the first. The success of the existing partnership 
programs, as we have heard, are outstanding, and most of the 
people who purchase coverage through them find that their 
benefits are more than adequate for their needs, and these 
programs also offer care options that are not always available 
through the Medicaid program.
    Preliminary studies suggest that the asset protection 
provided in a long-term care partnership program would not 
result in increased State expenditures but would generate 
savings for the States, and in fact, as we have heard, of the 
nearly 150,000 long-term care partnership policies in force, 
only 86 nationwide have ever accessed the Medicaid safety net.
    Unfortunately, because of OBRA 1993, there is an impediment 
that prevents the development of additional partnership 
programs and is interfering with the fact that 16 States have 
passed legislation, resolutions or studies indicating their 
desires to enact such programs. OBRA 1993 was written when the 
partnership programs were new and had not had a chance to prove 
their effectiveness. The concern at that point was that asset 
protection would favor only more affluent Americans, but this 
could not be further from the truth.
    A dollar for dollar model, which is used in most of the 
States, protects assets equal only to the amount of the 
benefits used, and even in New York, where the total asset 
model is tilted toward higher-income citizens, nearly 42,000 
partnership policies are in force, and in the 12 years since 
they have been enacted, only 38 people have accessed Medicaid.
    The folks in New York have seen that there were significant 
problems with or issues with folks looking to spend down their 
assets, but as we have said before, that has not yet come to 
fruition.
    But the real benefit for partnership programs is that they 
allow persons with moderate income to buy affordable basic 
coverage, with the assurance of a Medicaid safety net if their 
need for care exceeds the benefits available through their 
policy. NAHU believes that the language in OBRA 1993 
discriminates against the residents of the 46 States that 
cannot establish partnership programs, preventing individuals 
with moderate income from having the option to affordable 
private insurance for long-term care expenses.
    We applaud your actions, Senator Craig and Senator Bayh, 
for your work in sponsoring S. 2027 to move this process 
forward. We also applaud Congressman John Peterson of 
Pennsylvania and Earl Pomeroy of North Dakota for introducing 
H.R. 1406 in the House. We believe this legislation would save 
Medicaid millions of dollars, since long-term care needs would 
be met by the private sector rather than through public 
expenditure.
    Every dollar paid by a private long-term care insurance 
policy is potentially one less dollar paid by a State Medicaid 
program, and in addition, as we have heard, it would encourage 
greater self-reliance in people to meet their own care needs 
rather than relying on an already overburdened Government 
program.
    In short, now that we know that partnership programs work, 
it is time to extend them to all Americans. Consumers will have 
a choice of care options only available with private insurance 
coverage. Medicaid can provide an appropriate safety net as it 
was intended to do, and both Federal and State Government will 
reduce their Medicaid long-term care expenses. This is a win-
win situation for both the consumer and the Government.
    I thank you for your time today, and I look forward to 
answering your questions.
    [The prepared statement of Mr. Corcoran follows:]

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    The Chairman. Kevin, thank you very much.
    Now, let us turn to you, Steve. I said Cambridge. I did not 
say Cambridge, MN.
    Mr. Chies. That is correct, Senator.
    The Chairman. Thank you.

   STATEMENT OF STEVE CHIES, CHAIR, THE AMERICAN HEALTH CARE 
                   ASSOCIATION, CAMBRIDGE, MN

    Mr. Chies. I would like to thank Senator Craig and Bayh and 
every member of the Senate Aging Committee for providing us 
this opportunity to appear today. We certainly admire and 
respect the dedication and the effort that you have gone 
through in order to provide for America's citizens to try to 
meet their long-term care needs.
    My testimony today is given on behalf of the American 
Health Care Association and the National Center for Assisted 
Living. We represent over 10,000 members across the country, 
and our 1.5 million caregivers are providing quality care and 
services to about 1.7 million Americans who are in our care.
    As America will soon confront its greatest unfunded 
liability, the public cost of its long-term care needs, 
Congress certainly needs to investigate a variety of approaches 
that utilize the tax code and other incentives to more 
effectively meet the needs. In that regard, AHCA and NCAL 
strongly supports the Long-Term Care Insurance Partnership 
Program Act of 2000, legislation introduced by Senators Craig 
and Bayh, that expands the ability of citizens to purchase 
State-approved long-term care insurance policies and take 
control of how and where their long-term care needs are met.
    Should the need for care exhaust the benefit of the policy, 
the partnership program provides asset protection, thus 
allowing individuals to qualify for Medicaid without spending 
down their lifetime savings.
    Mr. Chairman, expansion of the long-term care insurance 
market is especially important. It is important for patients 
because it allows them to choose where and from whom their care 
is provided. It can empower them and their families to receive 
home or community-based care services if the extensive care 
needs of a nursing facility are not necessary.
    Expanding the long-term care insurance market will bring 
about funding stability for this important health care sector, 
which will result in the provision of higher quality care. For 
States and for taxpayers, the inherent benefit of expanding the 
long-term care insurance market is reduced financial and 
budgetary pressure on Medicaid-financed long-term care.
    The partnership is a good idea that must be pursued, but 
there are other issues as well. An expansion of long-term care 
insurance that incorporates the efficiency of the marketplace 
with the safety net guarantees associated with Government 
involvement has the potential to merit strong bipartisan 
support in Congress.
    Specifically, through tax incentives, tax deductions and 
credits, the nation's health care system becomes more 
efficient, more responsive to patient needs and individual 
choices and sustainability for the long term. With diligent 
development and implementation of a public-private hybrid, we 
could make it possible for the majority of future Medicaid-
eligible retirees to pay privately for the care they receive.
    This can only be accomplished by fundamentally shifting the 
role of Government from Government simply paying for services 
to Government helping individuals save for their own long-term 
care retirement needs. Enactment of the Long-Term Care 
Insurance Partnership Act is a critical but important step 
toward achieving that goal.
    Another initiative now serving as a bipartisan legislative 
precursor to a broader effort in the above-the-line tax 
deduction, this legislation has strong support in the House and 
the Senate. In an effort to see it move forward this session, 
this measure was included in the Ronald Reagan Alzheimer's 
Breakthrough Act of 2004, introduced just last week.
    In order to help establish the legitimacy and necessary 
citizen awareness of public-private programs, there must be a 
national informational effort designed to help individuals and 
their families understand their options and the consequences of 
inaction. The fact that 85 percent of Americans believe their 
long-term care insurance needs will be met by Medicare, 
Medicaid or their existing health insurance is alarming and 
underscores the need for government to help educate and inform 
its citizens to understand how to prepare for their retirement 
and financing their long-term care and health needs.
    When individuals understand the risks they face, the costs 
of care and the options before them, we as a nation should be 
confident that the vast majority of Americans will choose to 
act responsibly and plan for their own future needs and the 
needs of their families. This fundamental premise reflects 
Americans' values. Americans want to control their destiny, and 
every individual must and should take some level of 
responsibility for their future and that of their family.
    Through the Craig-Bayh legislation and tax incentive 
concepts we have outlined and through other vehicles, we 
believe that the capacity to fend off the inevitable collapse 
of Medicaid and perfect our nation's ability to ensure the 
long-term care needs of its citizens are met in a way of their 
choosing, but no matter how much wishful thinking Medicaid 
supporters can muster, the demographic realities require a 
change in policy and a transformation in our thinking.
    We thank you for this opportunity to testify before you 
today, and we look forward with you and this Committee to try 
and productively develop a strategy for providing long-term 
care needs that will meet every American citizen.
    Thank you.
    [The prepared statement of Mr. Chies follows:]

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    The Chairman. Steve, thank you very much for your 
testimony.
    Let us see if we can get--we have been reprieved a bit. The 
vote has been shoved forward on us, so maybe we can get through 
our rounds of questioning prior to that vote.
    Mark, let me turn to you. If this is such a good deal for 
Medicaid, private insurers and long-term care policy holders, 
and you call it a win-win; someone else referred to it as a 
win-win; who is the loser? Is there a loser?
    Mr. Meiners. I do not think there is a loser. I think this 
is one of those unique strategies that sort of balances 
different opinions and different perspectives and does so in a 
way that people can win. I think that people need to adjust 
their thinking a little bit differently. For example, the 
insurance industry is more comfortable or most comfortable 
probably with lifetime protection, maybe a little less so 
today.
    Marketing products that are one to 2 years or maybe 3 years 
is less common, so there needs to be some adjustment there. 
Agents will not make quite as much money on a one, two or 3-
year product as they would on a lifetime product, but if they 
sell more of them, they are still going to do well and also do 
what I said before: have more of a way to enter someone's home 
with a full portfolio of insurance interests for them, so I do 
not see them losing.
    States, well, I think that States, this gives them an 
opportunity to really provide a broad spectrum of options for 
their consumers as opposed to sort of being hesitant about 
that. In fact, with respect to the carrot and the stick, there 
has always been this sort of stick we have talked about, asset 
recovery. But States, as somebody said earlier, are hesitant to 
do that, because it is a political hot potato.
    But when you give people good options, it is a little 
easier to sort of speak in terms of carrot and stick, and so, I 
think that States can come out well with that. So and I think 
the consumers, the ones we can really help, are people--sorry 
Senator Kohl had to leave, but people like my mother, who I now 
next week will be helping to move into assisted living, people 
who are middle income--teachers, which she was--who could 
afford insurance and therefore help protect some of their 
resources.
    I think it is a win for them, whereas, otherwise, I think 
they look at the situation where they are faced with having to 
end up on Medicaid; they will either game the system, or they 
will just go bare and take the risk. I think those things put 
them in much less of an acceptable situation.
    So after many years of looking at this and thinking about 
it, I think it has a lot of positives, and when you ask about 
sort of the array of options out there of what to do about 
long-term care, I think this one fits very much even, in my 
opinion, a little more prominently than people were talking 
about. It is not the silver bullet; it is not the only option, 
but I think it is something that goes down to the middle class, 
who are really at risk of becoming impoverished because of 
long-term care. Many of the options we talk about do not get 
there, and that is very important.
    The Chairman. Thank you.
    Melanie, you have been out on the front line of this 
laboratory of experimentation that Evan knows better than most 
of us is State government. If you can work it well at the State 
level, and we have talked about now having programs out there 
on the market for a period of time and therefore clearly being 
able to assess it here, understanding it better, we are not 
very good at making intelligent guess estimates at what these 
programs will cost us when we get involved in them.
    But here, we may well be able to do so. Have you been able 
to estimate the cost savings to the State of Indiana since 
initiating your long-term care partnerships?
    Ms. Bella. We are getting closer at that. It is difficult. 
Now that we have had more experience, and we have had people 
who are actually getting into the period where they are 
exhausting their benefit, it allows us to begin to quantify 
that.
    Prior to anyone exhausting their benefit, we would just 
have to make a set of assumptions. So we do have some pieces 
that we are putting together to help us do that. For example, 
as Senator Bayh referenced, we survey a sample size of all new 
policies each quarter, and one of the questions we ask is how 
would you have funded your long-term care absent having one of 
these policies?
    Right now, we range 15 to 20 percent who respond that they 
would have sheltered their assets in order to get on Medicaid 
early. So our first step in trying to quantify this will be 
looking at our base of policy holders, estimating how many 
might make a claim each year and assuming 15 percent of those 
would have sheltered their assets.
    Where it gets a little more difficult is knowing how long 
they would have needed care, because, as I said, the average 
person would not exhaust their benefit before they would need 
to turn to Medicaid. So the short answer is we are working on 
it, but we do know the State spends a minimum of $35,000 a year 
on someone on Medicaid in a nursing home. So at a rough guess, 
every year that we can delay or prevent each person going onto 
Medicaid, know we are saving actually the State and the Federal 
Government at least that amount of money.
    Senator Bayh. Can I interject, Mr. Chairman?
    The Chairman. You certainly may, and I am going to turn to 
you, because my time is up on the first round, so I will let 
you take this over.
    Senator Bayh. Melanie, is it fair to say that you are 
getting closer to quantifying the savings, but it is savings we 
are talking about here?
    Ms. Bella. It is more than fair to say that. It is 
definitely savings we are talking about when we look at the 
benefit that has been exhausted and then look at the number of 
people who have actually gone onto Medicaid, which, as I 
mentioned, is only 13 people out of our pool.
    So we are working with our actuary and actually the other 
three States as well so that we can come up with a standard 
methodology to do this, but we definitely believe that the 
numbers show that the savings exceed any possible cost due to 
asset protection.
    Senator Bayh. So from the taxpayer's standpoint, it is 
unquestionably a good thing. It is just a question of how much 
of a good thing.
    Ms. Bella. Exactly.
    Senator Bayh. Bob, I would like to build upon that. We 
focused here on the financial considerations. In your 
testimony, you spoke about, I think very eloquently about 
having run a good race and the emotional and psychological 
costs and strains that come with having to wonder whether that 
is all going to go for naught because of a health event beyond 
your control.
    I would like to get your reaction to the notion: even if it 
is a break even deal for the Government, that does not cost the 
Government; does not save the Government; does not cost the 
Government, is it not a real benefit to average citizens to 
take that worry off of your shoulders? So from a societal 
standpoint, putting the finances aside, the evidence suggests 
it is a good thing financially for the Government, but even 
putting that aside, from a citizen's standpoint, is there not a 
real benefit here that, all else being equal, is important to 
society, too?
    Mr. Bishop. I certainly think so. The emotional aspect of 
it is tremendously important. The fact you know you have taken 
steps to handle a situation that has a reasonable chance of 
occurring is in itself, comforting. If the situation does 
develop, it is important, particularly for the spouse that 
remains at home, to know the assets that person is relying on 
to provide the income that will enable them to continue their 
lives as normally as possible, remains in place.
    They do not have to worry about where funds will come from 
to pay the mortgage, or purchase food and other necessities. So 
yes, the emotional aspect of having long-term care insurance 
with the protection plan or the partnership plan is very 
important.
    Senator Bayh. It sounds like one of the lessons that we 
should take away from your testimony is that you probably would 
advise your children or your grandchildren to buy these 
policies a little bit earlier in life; is that correct?
    Mr. Bishop. I think that is clear. I waited until I was 67 
years old, and that was too late. That is not to say I should 
have not purchased it, but had I purchased it earlier, it would 
have been a much less important segment of my monthly 
expenditures.
    In fact, we have five children, the oldest is 50 and the 
youngest is 42. The one that is 50 and I have talked about long 
term care insurance with him. He was very pleased that I made 
the decision I did in 2001, but he is not really enthusiastic 
about doing so himself.
    However, to be perfectly fair with him, he is putting two 
children through college right now, so he is a little 
preoccupied.
    Senator Bayh. We can all relate to that. You might be 
interested to know we have another piece of legislation that 
would make several thousand dollars of the premiums for these 
policies tax deductible to incent people. That might get your 
son's attention.
    The Chairman. I was going to say, Evan, he may be 
preoccupied, but his money is really preoccupied if he has got 
kids in college.
    Mr. Bishop. Absolutely right.
    What you just spoke of is important. As you know, Indiana 
has that feature, and the premiums for a partnership plan are 
deductible from the State gross tax. That is an incentive. The 
partnership is an incentive. Then, if the Federal tax code was 
modified, as you suggest, that would be another push toward 
furthering this program.
    Senator Bayh. Thank you, Bob. By the way, you are correct. 
We did start--the 1991 figure I referred to is when the Federal 
Government gave us approval to go forward, 1993 is when the 
first policies were made available. So thank you for bringing 
that to all of our attention today.
    Mark and Melanie, let me ask both of you: from your 
testimony, it sounds like both of you, really, everybody we 
have heard from today, there really is no evidence that wealthy 
people are using this as a way to access Medicaid. Is that a 
fair statement?
    Mr. Meiners. Yes, I think that is a fair statement. I mean, 
it is something that we were confronted with early on and 
thought a lot about it. I will give you----
    Senator Bayh. It is a theoretical concern, but in fact, it 
does not sound as if it has been borne out.
    Mr. Meiners. Right; I mean, there are several ways to look 
at it. First of all, wealthy people; this protects assets, not 
income, OK? So if someone has a lot of assets out there, it is 
going to be generating the kind of income that is going to have 
to be used to pay for the claim. So that is one protection.
    Another thing is, you know, none of us truthfully aspires 
to get our long-term care through Medicaid. I mean, it is just 
a fact. We want it to be as good as it can be, but it is not as 
good as if you can buy it on your own. Then, the other part of 
why I think the States have opted to, you know, not exclude 
high end people is because it is nice to have folks like that 
as part of the risk pool, frankly, because they are very, very 
unlikely to ever need Medicaid, and yet, their premiums are 
contributing to the pooling that you need to share the risk.
    So there are a lot of reasons to not, I think, worry about 
that particular concern and make this sort of a more or less a 
one size fits all. I personally favor the dollar for dollar 
approach, because it really gets to the middle and modest 
income people, but I was a fan of what Indiana did with the 
hybrid of the two models.
    Senator Bayh. Melanie, our experience has not been one 
where the more well to do are accessing Medicaid through this 
mechanism; is that correct?
    Ms. Bella. That is correct. We do not have any reason to 
believe that it is not appealing to our target group, which is 
the middle, low-upper middle income group, who is really going 
to be caught with having just enough assets that they could be 
in a position where they would be spending those down to get on 
Medicaid yet not enough to never have to worry about it, which 
it is that group that they really do not need this protection 
as much, because they have the means there to pay for their 
nursing home care and still be able to preserve their assets, 
because they are at such a high level.
    But it really does appeal to that group right in the middle 
who really have a need to protect those assets.
    Senator Bayh. The final thing I would say, Mr. Chairman: I 
was asking one of my very able assistants about the 16 States 
that have applied.
    This deals with reciprocity, Melanie. Florida has not yet 
applied, so maybe we need to get the word to the people in the 
great State of Florida. There may not be many folks retiring 
between Connecticut and Indiana, Melanie. I suspect if we 
conducted a marketing campaign in Connecticut about the lower 
tax rates in Indiana, maybe we could promote some of that, but 
it has not happened to date, but that is something that a 
nationwide system would clearly enable people to move and 
retire and still access this kind of protection, so that is a 
good point.
    Mr. Chairman, I thank you for your leadership, and it is a 
pleasure working with you, and Bob, Melanie, all of you, I want 
to thank you for your expert testimony here today. It really 
does help shine a light on this, and hopefully, we will get 
some momentum behind what I think all of you have just 
described as a win-win idea.
    The Chairman. Evan, thank you very much.
    Kevin, let me turn to you: what is the motivation for 
insurers to offer State-approved long-term care plans over 
their current long-term care plans?
    Mr. Corcoran. Well, what we are seeing is that as Mark had 
said, long-term care is in a lot of cases still seen as a niche 
market. The opportunity to access a broader marketplace by 
having programs in all the States, by having a program of 
reciprocity that will allow them to aggregate their risk and 
aggregate the participants in the program is appealing to them.
    There is obviously a lot of interest in long-term care, and 
anything that can be done to expand the size of the marketplace 
is going to be appealing to them. The partnership program is 
something of a built-in marketing program for them, because the 
State will be explaining the benefits of it, and if they are 
participating in the program, that gives them an opportunity to 
address those consumers, to be able to get in front of them and 
sell their products that they are trying to sell now, but it 
gives them another step in the door.
    The Chairman. Well, what is the greatest reservation, then, 
for carriers to participate in long-term care partnerships?
    Mr. Corcoran. At the outset, we had some carriers that were 
concerned about some of the issues as far as the administrative 
expense, making sure that there is uniformity and 
administrative efficiencies across all of the different lines, 
and they are concerned that they may end up with a lot of 
fragmented products.
    But that has pretty much evaporated. Those issues have been 
addressed. They have worked them out for themselves, so we are 
not seeing that as an issue anymore. I do not believe there 
really are any.
    The Chairman. We have heard talk of two models here: the 
total asset model and the dollar for dollar model. Which model 
is best for the consumer from your point of view?
    Mr. Corcoran. I am not sure that there is a best. I think 
that the different models have different pros and cons, and for 
different individuals, they are going to serve folks in a 
different way. I think Indiana's approach of offering both 
programs is an innovative way to be able to address all aspects 
of your marketplace. In fact, Governor Pataki in New York has 
put forward a proposal in his budget to create a dollar-for-
dollar model to complement the total asset model that New York 
currently has.
    NAHU has prepared language and model language for States to 
use, and we do typically represent or present to them the 
dollar-for-dollar model as the model of choice, but again, it 
is one that each State and each individual will need to see 
what options work best for them.
    The Chairman. Thank you.
    Steve, what is the strongest motivation for providers to 
support State-approved long-term care plans over current long-
term care plans?
    Mr. Chies. Well, Senator, I think it is basically to see 
the expansion of the long-term care insurance market. We 
believe this is one tool, one more mechanism to educate the 
public in terms of the risk factors that they have. The 
partnership programs are good because it goes in partnership 
with the State and the Federal Government and the private 
sector to assure that there are not any missing elements here 
for an individual who may run through a policy.
    I think that is probably the key issue is that if, in fact, 
you have a truly catastrophic event, somebody is not going to 
run through a policy and then have to get into their asset base 
at that point.
    The Chairman. Does private pay allow facilities to provide 
better care to the people dependent on them, depending on them?
    Mr. Chies. That is a tough question. I think that----
    The Chairman. That is why I ask it.
    Mr. Chies. I know; it is a good question, Senator.
    I think that we know in the studies we have done of the 
Medicaid systems across the country is that the States are 
under incredible fiscal pressure, and they have had to short 
the Medicaid program, and that does put pressure on facilities.
    We know that 70 percent of our costs are wage and wage-
related, and so, as I talked with public policymakers around 
the country and in my State of Minnesota, I have said that when 
you have to cut providers' rates, you are really balancing the 
budget on the backs of our employees, because that is where our 
expenses are. If we cannot get high quality employees because 
of pinches in the Medicaid program, it makes it more difficult 
to provide quality care and services.
    The Chairman. So it is a net benefit to all parties 
involved.
    Mr. Chies. Yes, Senator.
    The Chairman. In this case, of course, the quality of care.
    Evan, do you have any further questions you would like to 
ask?
    Senator Bayh. I am fine, Mr. Chairman.
    The Chairman. All right; lady and gentlemen, thank you all 
very much for being with us. We appreciate your work in helping 
us move this issue. We think it is very important as one of 
those many things that we need to do, recognizing the States' 
problems and recognizing that future large wave of people my 
age and a little older who are heading toward these kinds of 
care needs that America recognizes.
    So convincing a majority is going to be important here. We 
think that can be done for all the reasons you have just 
stated: that it is a relatively easy sell in what we have to do 
here, but your help will be greatly appreciated, and we thank 
you for being with us today.
    Senator Bayh. I would only add one final thing, Mr. 
Chairman. As you can see, this is a bipartisan effort----
    The Chairman. Absolutely.
    Senator Bayh [continuing]. Which is somewhat rare in this 
town, but it shows how strong the merits of this are, and I am 
just pleased to work with Senator Craig to help make this 
happen. So I think that is important to note.
    The Chairman. Evan, thank you very much, and the Committee 
will stand adjourned.
    [Whereupon, at 11:21 a.m., the Committee adjourned.]

                                 
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