    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

      LONG-TERM CARE AND MEDICAID: SPIRALING COSTS AND THE NEED FOR REFORM

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

                                    HEARING

                                   before the

                             SUBCOMMITTEE ON HEALTH

                                     of the

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 27, 2005

                                   __________

                               Serial No. 109-24

                                   __________

          Printed for the use of the Committee on Energy and Commerce

     Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                     house

                                   __________

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                        ------------------------------
                        COMMITTEE ON ENERGY AND COMMERCE

                          JOE BARTON, Texas, Chairman

    RALPH M. HALL, Texas                 JOHN D. DINGELL, Michigan
    MICHAEL BILIRAKIS, Florida             Ranking Member
      Vice Chairman                      HENRY A. WAXMAN, California
    FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
    CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
    PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
    NATHAN DEAL, Georgia                 FRANK PALLONE, Jr., New Jersey
    ED WHITFIELD, Kentucky               SHERROD BROWN, Ohio
    CHARLIE NORWOOD, Georgia             BART GORDON, Tennessee
    BARBARA CUBIN, Wyoming               BOBBY L. RUSH, Illinois
    JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
    HEATHER WILSON, New Mexico           BART STUPAK, Michigan
    JOHN B. SHADEGG, Arizona             ELIOT L. ENGEL, New York
    CHARLES W. ``CHIP'' PICKERING,       ALBERT R. WYNN, Maryland
    Mississippi, Vice Chairman           GENE GREEN, Texas
    VITO FOSSELLA, New York              TED STRICKLAND, Ohio
    ROY BLUNT, Missouri                  DIANA DeGETTE, Colorado
    STEVE BUYER, Indiana                 LOIS CAPPS, California
    GEORGE RADANOVICH, California        MIKE DOYLE, Pennsylvania
    CHARLES F. BASS, New Hampshire       TOM ALLEN, Maine
    JOSEPH R. PITTS, Pennsylvania        JIM DAVIS, Florida
    MARY BONO, California                JAN SCHAKOWSKY, Illinois
    GREG WALDEN, Oregon                  HILDA L. SOLIS, California
    LEE TERRY, Nebraska                  CHARLES A. GONZALEZ, Texas
    MIKE FERGUSON, New Jersey            JAY INSLEE, Washington
    MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
    C.L. ``BUTCH'' OTTER, Idaho          MIKE ROSS, Arkansas
    SUE MYRICK, North Carolina
    JOHN SULLIVAN, Oklahoma
    TIM MURPHY, Pennsylvania
    MICHAEL C. BURGESS, Texas
    MARSHA BLACKBURN, Tennessee

                          Bud Albright, Staff Director

            David Cavicke, Deputy Staff Director and General Counsel

          Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                     ______

                             Subcommittee on Health

                         NATHAN DEAL, Georgia, Chairman

    RALPH M. HALL, Texas                 SHERROD BROWN, Ohio
    MICHAEL BILIRAKIS, Florida             Ranking Member
    FRED UPTON, Michigan                 HENRY A. WAXMAN, California
    PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
    CHARLIE NORWOOD, Georgia             FRANK PALLONE, Jr., New Jersey
    BARBARA CUBIN, Wyoming               BART GORDON, Tennessee
    JOHN SHIMKUS, Illinois               BOBBY L. RUSH, Illinois
    JOHN B. SHADEGG, Arizona             ANNA G. ESHOO, California
    CHARLES W. ``CHIP'' PICKERING,       GENE GREEN, Texas
    Mississippi                          TED STRICKLAND, Ohio
    STEVE BUYER, Indiana                 DIANA DeGETTE, Colorado
    JOSEPH R. PITTS, Pennsylvania        LOIS CAPPS, California
    MARY BONO, California                TOM ALLEN, Maine
    MIKE FERGUSON, New Jersey            JIM DAVIS, Florida
    MIKE ROGERS, Michigan                TAMMY BALDWIN, Wisconsin
    SUE MYRICK, North Carolina           JOHN D. DINGELL, Michigan,
    MICHAEL C. BURGESS, Texas              (Ex Officio)
    JOE BARTON, Texas,
      (Ex Officio)

                                      (ii)

                                C O N T E N T S

                                   __________
                                                                       Page

    Testimony of:
        Allen, Kathryn G., Director, Health Care, Medicaid and
          Private Health Insurance Issues, U.S. Government
          Accountability Office......................................    78
        Feder, Judith, Dean, Public Policy Institute, Georgetown
          University.................................................   140
        Hansen, Jennie Chin, Board of Directors, Class of 2008, AARP.   132
        Holtz-Eakin, Douglas, Director, Congressional Budget Office..    31
        Ignagni, Karen, President and CEO, America's Health Insurance
          Plans......................................................   104
        Krooks, Bernard A., Littman Krooks LLP.......................   115
        McClellan, Mark B., Administrator, Centers for Medicare and
          Medicaid Services..........................................    20
        Moses, Stephen, President, Center for Long-term Care
          Financing..................................................   111
        O'Shaughnessy, Carol V., Specialist in Social Legislation,
          Domestic Social Policy Division, Congressional Research
          Service....................................................    90
        Page, Lee, Associate Advocacy Director, Paralyzed Veterans of
          America....................................................    73
        Stucki, Barbara, Project Manager, the National Council of the
          Aging......................................................   125
    Material submitted for the record by:
        Allen, Kathryn G., Director, Health Care, Medicaid and
          Private Health Insurance Issues, U.S. Government
          Accountability Office, response for the record.............   169
        Feder, Judith, Dean, Public Policy Institute, Georgetown
          University, response for the record........................   173
        Holtz-Eakin, Douglas, Director, Congressional Budget Office,
          response for the record....................................   172
        O'Shaughnessy, Carol V., Specialist in Social Legislation,
          Domestic Social Policy Division, Congressional Research
          Service, response for the record...........................   168
        Page, Lee, Associate Advocacy Director, Paralyzed Veterans of
          America, response for the record...........................   174

                                     (iii)

      LONG-TERM CARE AND MEDICAID: SPIRALING COSTS AND THE NEED FOR REFORM

                                  ----------

                           WEDNESDAY, APRIL 27, 2005

                      House of Representatives,
                      Committee on Energy and Commerce,
                                        Subcommittee on Health,
                                                        Washington, DC.
        The subcommittee met, pursuant to other business, at 11:24
    a.m., in room 2123 of the Rayburn House Office Building, Hon.
    Nathan Deal (chairman) presiding.
        Members present: Representatives Deal, Bilirakis, Upton,
    Gillmor, Norwood, Cubin, Shimkus, Shadegg, Buyer, Pitts, Bono,
    Ferguson, Rogers, Myrick, Burgess, Barton (ex officio), Brown,
    Waxman, Rush, Eshoo, Green, Strickland, Capps, Allen, Baldwin,
    and Dingell (ex officio).
        Also present: Representatives Wilson and Engel.
        Staff present: Chuck Clapton, chief health counsel; David
    Rosenfeld, majority counsel; Jeanne Haggerty, Majority
    professional staff; Eugenia Edwards, legislative clerk; Brandon
    Clark, health policy coordinator; Bridgett Taylor, minority
    professional staff; Amy Hall, minority professional staff;
    Jessica McNiece, research assistant; and David Vogel, research
    assistant.
        Mr. Deal. The subcommittee will come to order. We will have
    members joining us, I am sure, in just a few minutes, so we are
    pleased to open this hearing today, and we have two panels.
        The first is two individuals, very distinguished
    individuals, Dr. Mark McClellan, who is the Administrator of
    the Centers for Medicare and Medicaid Services, and Dr. Douglas
    Holtz-Eakin, who is the Director of the Congressional Budget
    Office.
        Gentlemen, we are pleased to have you with us today. This
    is a hearing that I think all of us have looked forward to. Dr.
    McClellan, I realize that your testimony was a little late
    getting in, and we would just encourage you to get it here a
    little earlier. It will facilitate, perhaps, some of the
    members and their questions, and understanding your testimony
    today. But we are pleased to have both of you here.
        I will recognize myself, as I have just done, for purposes
    of an opening statement. As we deal with the question, in
    particular, of the spiraling costs of Medicaid, we are hearing
    from our Governors, as I am sure Dr. McClellan, you are hearing
    from Governors as well. My Governor and many Governors that
    members of our subcommittee have met with, both formally and
    informally, are continuing to tell us that they simply can't
    afford the program, as it is currently in place, and they are
    requesting that we make changes.
        Hopefully, some time during this session of Congress, we
    will have the opportunity to address that issue in greater
    detail. But I think your testimony here today will lay a
    groundwork for us to understand what the parameters of the
    problem are, and perhaps some of the solutions that may be
    available to us.
        Everybody, I am sure, has their own personal story about
    dealing with the problems of long-term healthcare, for example,
    which is a major component, obviously, of the Medicaid
    expenditures. I have been jokingly told by some that I need a
    license to operate my home, because some 8 years ago, by
    fortuitous circumstances, my mother, who is now 98, came to
    live with us, because she had to have a leg amputated, and was
    bound in a wheelchair, and could no longer live alone. About
    the same point in time, my wife's mother and father came to
    live with us as well. Her mother had been diagnosed with
    Alzheimer's, and she has since passed away, but her father, who
    is now 91, continues to live with me, and with us in our home.
        But these are not unusual circumstances for families to
    face. Very few have the opportunity to take their parents into
    their home and provide for them. And it is not that my parents
    or my mother or my father-in-law are wealthy people. They are
    retired public schoolteachers, but they have not gone into a
    publicly financed Medicaid nursing home environment. There are
    many others out there who would like to have avoided a nursing
    home as well, and I think one of the options that hopefully we
    will explore, as we visit this issue of long-term healthcare in
    particular, is how do we afford families the opportunity to
    provide for themselves and for their loved ones, in an
    environment outside of a nursing home. Many people would
    desire, I think, that option, and I think that under our
    current rules, we don't have the flexibility to allow States to
    design programs that perhaps would accommodate those wishes.
        There are many other facets, obviously, of the Medicaid
    problem, but the one that I continue to harp on, and it is an
    essential ingredient that I think causes the problem, and if we
    can fix it, will perhaps provide the solution, and that is, the
    current absence of individual responsibility in the program as
    it is designed. It is the lack of individual responsibility
    that causes the concerns of hospitals, who constantly tell me--
    in a meeting I had recently with my local hospital, that in
    excess of 70 percent of their emergency room visits could
    probably be classified as non-emergency, and virtually all of
    those are being paid for through Medicaid, a program that is
    costing us huge amounts of money at both the State and Federal
    levels.
        It is that lack of personal responsibility in the design of
    the program that needs to be fixed. If we do that, and
    Governors have continually indicated that they would like to be
    able to address that issue, that if we do that, I think
    hopefully we can design something, as we approach the problems
    and look for solutions, something that will individually make
    us responsible for recognizing that this is not just something
    that somebody else is going to pay for for us. We have a part
    in it, and we ought to be responsible in our participation.
        At this time, I would recognize Mr. Brown, the Ranking
    Member of the subcommittee, for an opening statement.
        Mr. Brown. Thank you, Mr. Chairman. I echo the chairman's
    words and comments about the testimony of Dr. McClellan. He
    came to us at 10:15 last evening, and I know the staff on both
    sides of the aisle works really hard, but not all of them were
    there when it came, and then it was edited this morning, in
    sort of a second round. I hope you will work to do better than
    that. I know it is always difficult to prepare for these
    hearings.
        I commend the chairman for enabling the subcommittee to
    consider the future of long-term care, one of our healthcare
    system's most critical issues. I would like to suggest, though,
    a subtle but important shift in perspective. Instead of
    focusing on spiraling long-term care costs, let us focus on
    spiraling long-term care needs. Our population is aging, and
    the need for long-term care is keeping pace. We should focus on
    the actual issue, not one of its manifestations.
        If we frame this discussion around the need to reduce long-
    term care costs, we are basically saying that the cost of
    caring for individuals is more important than the individuals
    themselves. If, on the other hand, we focus on the need for
    long-term care, we will not, then, neglect important
    considerations. For example, we know there are gaps in access
    to long-term, particularly home and community-based services.
    Is that fact more or less important than long-term care--than
    the fact that long-term care costs are growing? And we know
    that regardless of how these services are financed in the
    future, there are elderly and severely disabled Americans who
    need long-term care now. Medicaid covers 70 percent of that
    care. If we cut Medicaid funding today, we place particularly
    vulnerable segments of our population at risk.
        We can discuss reverse mortgage and long-term care
    insurance and personal responsibility until we are blue in the
    face, and there is a role for all of that, but the fact is, if
    we cut Medicaid today, we jeopardize the health and safety of
    people whom we know, of real people. All of our efforts to
    prepare for the future don't change that basic fact. If you
    think I am overly dramatic, talk to an elderly person at an
    understaffed nursing home. Talk to her family, especially. Do
    we really think that today's nursing homes are filled with
    scheming seniors who are free riding on the taxpayer's dime?
    There will always be people who try to game the system,
    occasionally some successfully, but most Medicaid beneficiaries
    don't want to be Medicaid beneficiaries. They simply have no
    choice.
        If we focus on long-term care needs, rather than long-term
    care costs, we will make sure our efforts to prevent asset
    transfers don't disenfranchise people in real need. We will
    make sure the long-term care insurers do not cherry pick or
    fail to deliver adequate benefits. We will think carefully
    before forcing people in an ownership society to give up their
    homes in order to get needed care. Instead of focusing on how
    to reform Medicaid to address spiraling costs, let us focus on
    how to make sure every American who needs long-term care has
    access to it.
        That means promoting private, long-term care savings. It
    means investing in Medicaid as a cost effective safety net for
    people in need. Absent a universal, long-term care system,
    there will of course always be people in need. I understand Dr.
    McClellan will talk about the President's commitment to home
    and community-based care, and I share both Dr. McClellan's and
    the President's enthusiasm for it. However, home and community-
    based care waivers typically have enrollment caps. Making these
    waivers permanent, as the President proposes, doesn't expand
    access to home and community-based care. Additional funding is
    needed to accomplish that, and I don't recall any increase in
    funding for home and community-based care in the President's
    budget. This care is cost effective, but there is unmet need
    outside the nursing home population. Expanding access requires
    additional dollars.
        That doesn't mean we should give up on the idea of
    expanding access to home and community-based services. In fact,
    promoting access to these services should be a priority. But
    championing the expansion of home and community-based care, and
    at the same time, pushing for cuts in Medicaid, is a little bit
    like handing a person an umbrella, then pushing him off a
    cliff. We can't reduce the long-term care--we can't reduce the
    need for long-term care by reducing our current investment in
    it.
        It is important to plan for long-term care needs in the
    future. It is even more important to meet our long-term care
    commitments today. If we are willing to cut Medicaid without
    regard to those we hurt, why even bother with this hearing?
    Apparently, the best way to reduce Federal long-term care
    spending is simply to abandon those who rely on it. I think we
    should take a different path.
        Thank you, Mr. Chairman.
        Mr. Deal. The Chair recognizes Dr. Norwood for an opening
    statement, 5 minutes.
        Mr. Norwood. Thank you.
        Mr. Deal. Or 3 minutes, excuse me.
        Mr. Norwood. Thank you very much, Mr. Chairman. Dr.
    McClellan, I am certainly happy to see you here, and thus have
    the opportunity to talk to you. I also would like to add to the
    fact that you need to tell your staff to get us your statement
    earlier. That is really unacceptable. It means to me you don't
    think we are important in this issue, and I know this committee
    finds this very important, or either--it is not important to
    you guys.
        Few of us can be certain, frankly, how technological and
    medical developments will affect the issue of long-term care.
    What we do know, that the current system is not going to be
    able to meet the obligations of future generations. I think
    that is fairly clear. It is unfortunate that Americans have
    routinely avoided even thinking about long-term care until it
    is too late, yet some studies show that upwards of 40 percent
    of all Americans will need some sort of long-term care during
    their lives, and two-thirds of all recipients of long-term care
    must depend on Medicaid due to costs.
        Recently, as I have recovered from my own little battle
    with idiopathic pulmonary fibrosis, I have experienced the
    difficulties of battling an illness, and I know the
    irreplaceable value of being able to turn to your family, to
    your wife, your faithful nurse. But many are not so fortunate
    as I, and must rely on the government to provide for their
    care.
        While Medicaid is primarily a source of financing for long-
    term care, the current financing system is ineffective, and is
    often taken advantage of. When our social programs were
    established, long-term care, as we know it, did not exist.
    People in need of support often received care from a family
    member, or were institutionalized. All of us can remember our
    grandfathers, grandmothers, and how long-term care was handled
    for them. As we enter the 21st century, care is significantly
    different. Unfortunately, our financing mechanisms have not
    kept pace. In that light, it is impossible to talk about
    reforming Medicaid without addressing the funding of long-term
    care, which I understand is about 56 percent of the cost.
        Because Medicaid is an alternative to private insurance,
    the program encourages people, encourages people to drop
    coverage or avoid long-term care planning, and rely instead on
    this free Medicaid. Put simply, Medicaid discourages proper
    planning, and is quickly becoming a welfare program for middle
    income families. With clever estate planning and asset
    protection schemes, individuals can qualify for Medicaid and
    receive long-term care taxpayers' expense.
        Moving away from such abuse would allow Medicaid to return
    to its proper mission, and I am sure everybody on this
    committee agrees with that. And it would provide a safety net
    for those who truly need it. I am looking forward to your
    testimony and your guidance on this very subject.
        Mr. Chairman, thank you for the time.
        Mr. Deal. I thank the gentleman. The Chair now recognizes
    the gentlelady from California, Ms. Eshoo, for 3 minutes for an
    opening statement.
        Ms. Eshoo. Thank you, Mr. Chairman, for holding this
    hearing, and also for the markup that we had earlier today.
    Welcome to our witnesses, Dr. McClellan, it is especially good
    to see you.
        The financing of long-term care for the elderly population
    in our country really does need to be addressed, so that the
    challenge won't become our No. 1 economic problem of tomorrow.
    And I think that it is an economic issue. I don't know how many
    members of this committee have even taken advantage of buying
    long-term care insurance through the Federal Government. That
    might be an interesting little survey to do. I am one of them,
    because I can't help but think daily that if something happens
    to me, I--my young children are not going to be able to take
    care of me. So--but it is something that is expensive. It isn't
    something that everyone thinks that they need, because most of
    us think that we really are not in a position where we will
    need it.
        It is an issue that touches all families at some point in
    our family life. I know that. I took care of my own father and
    mother, and we have heard stories from other members as well.
    While it is important to note that modern medical care has
    enabled more and more seniors to live longer, healthier lives,
    there still comes a time when families are simply not able to
    provide the full care for a loved one. The next step is
    professional care, either at home, in an assisted living
    facility, or in a nursing home. And none of us want to go to
    nursing homes. I think that is one thing that everyone would
    raise their hands and say we are in agreement on. We just don't
    want to have to do that.
        So given the level of care required, personal resources,
    and insurance benefits are often quickly used up. Approximately
    one in eight Americans is over the age of 65, and this number
    is expected to increase dramatically. Congress really should
    act before this wave of seniors overwhelms our current Nation's
    public programs for long-term care. We should look at long-term
    care creatively, and include a mix, I think, of approaches to
    address its viability by combing some of the aspects of
    incentives for private financing as well as public financing.
    Congress should also build on current programs by expanding
    eligibility.
        Individuals have diverse needs and diverse circumstances,
    so I don't think that really one size fits all, and there
    should be a varied approach which would respond to these needs
    and these circumstances. I hope our witnesses today will
    address the long-term care partnership program, and whether or
    not this program would have much impact on the growth of
    Medicaid long-term care spending.
        So I look forward to hearing the witnesses. They are all
    stars in their own right, and I think this committee can really
    gain from your vision and your experience and what you can tell
    us. Thank you, Mr. Chairman, and I yield back.
        Mr. Deal. I thank the gentlelady. I recognize the
    gentlelady, Ms. Cubin.
        Ms. Cubin. Thank you, Mr. Chairman. I agree with everything
    that has been said so far, and so I won't repeat that. But I do
    want to just add a couple other comments.
        There are a lot of policies, rules and regulations, that
    simply waste money in Medicaid and Medicare when going into a
    nursing home. One example that I can think of is that you have
    to be in the hospital for 3 days before you can go into a
    nursing home, when the doctor knows very well, the family knows
    very well, that a nursing home is definitely what is needed.
        My mother is in advanced stages of Alzheimer's right now,
    and my father has planned well financially for their
    retirement, but even at that, he says he will put her in a
    nursing home over his dead body. He is fortunate enough to be
    able to hire people to come in and help him right now, but that
    may not last forever, and I am concerned about what happens to
    people who have actually planned, but the prices are so
    exorbitant that the surviving spouse finds themselves in a
    situation where they can't afford to pay for their care,
    because the system is abused, and because there is waste in the
    system, and it is ineffective. We need an entirely new system,
    so with that, I will yield back my time.
        Mr. Deal. I thank the gentlelady. I recognize Mr. Allen for
    an opening statement.
        Mr. Allen. Thank you, Mr. Chairman. I appreciate your
    convening this hearing to examine Federal long-term care
    initiatives. The need for long-term care is expected to grow
    substantially in the future, straining both public and private
    resources, so we need to bolster our long-term care
    infrastructure to meet the needs of our growing elderly
    population.
        While most care is provided by family members, most public
    funding is for institutional care. Home and community-based
    services which can help heavily burdened families are available
    sometimes in a limited number of communities. In 2002, the
    Maine State legislature established a blue ribbon commission to
    examine the financing of long-term care, and consider
    opportunities to build on the Federal State commitment to
    caring for the State's elderly and disabled population.
        Like most States, Maine found that nursing facility care is
    the most intensive and costly component of the long-term care
    system. Approximately 26,000 individuals in Maine received
    financial assistance for long-term care needs in 2001. Funds
    were allocated as follows: 61 percent for nursing facility, 20
    percent for home-based care, and 19 percent for assisted
    living.
        MaineCare, the State's Medicaid program, accounted for 70
    percent of the patient days in nursing facilities. While the
    average cost, average actual cost of operations for nursing
    facilities was $167 per day, the average allowable MaineCare
    costs was $129 a day, and the average MaineCare reimbursement
    was $117 per day. This rate includes both Federal and State
    dollars. In the national study being released today, the
    average shortfall in Medicaid nursing home reimbursement was
    $12.58 per Medicaid patient day in 2002, translating into an
    annual shortfall of $4.5 billion.
        The point I am making here is that Medicaid is, in some
    instances, both wasteful and in some instances, simply not even
    coming close to paying for the costs of care of Medicaid
    patients. And I urge anyone looking at this area not to make
    assumptions about Medicaid across the spectrum of the country.
    My father was in a nursing home in Maine for about almost 2
    years before he died, and I have been in a lot of nursing homes
    in Maine, and they are really stretched, and the people who are
    in them--Maine went through a process of really putting a lot
    of pressure on nursing home facilities, and encouraging
    community-based care over the last 15, 20 years, and the result
    is the people in nursing homes today in Maine really need to be
    there. I have no idea whether that is comparable in other
    States, but I do think that we have to deal with that
    particular issue, we have to deal with the fact that too many
    seniors don't want to think about, and middle aged people,
    don't want to think about being in long-term care, and that
    long-term care insurance sometimes is available, but often is
    too expensive for many people.
        I look forward to hearing everything you have to say, and
    Mr. Chairman, I yield back.
        Mr. Deal. I thank the gentleman. The Chair recognizes Mr.
    Pitts for an opening statement. Ms. Bono. Dr. Burgess.
        Mr. Burgess. Thank you, Mr. Chairman. I will submit my
    statement for the record as well. I just want to welcome Dr.
    McClellan. Good to see you again, sir, and just for the record,
    I too have long-term insurance. I have a private policy with GE
    Capital that I bought before coming to Congress.
        Mr. Deal. The Chair recognizes Ranking Member Dingell, for
    an opening statement.
        Mr. Dingell. Mr. Chairman, thank you. I commend you for
    this hearing. As a Nation, we must develop a comprehensive,
    long-term care policy in order to care for the 10 million
    people needing long-term care, and millions more that will need
    it in the next 20, 40, and 60 years. This is an important but
    complicated issue that the committee should be going into, so I
    thank you again for holding this hearing, as well as the
    witnesses who are here today to cooperate with us and educate
    us.
        The majority of long-term care is provided for free through
    family or friends. Of the services purchased, Medicaid is the
    biggest payer, and the greatest safety net. It provides care
    for millions of elderly people and individuals with
    disabilities that have had the misfortune of becoming ill and
    needing help with their daily basic activities of ordinary
    life.
        Sustained care is expensive and, without Medicaid, almost
    impossible for many. Most people struggle even with Medicaid to
    meet their most essential needs, such as eating, bathing, or
    going to the bathroom. Still, Medicaid always benefits from
    evaluation and updating. For example, we need to be rid of the
    program's bias toward institutional living, and provide home
    and community-based care where appropriate.
        Unfortunately, instead of talking about ways to shore up
    Medicaid as a safety net, there are now efforts in this House
    of Representatives and in the administration, under the
    leadership of my Republican colleagues, in trying to actually
    cut it. The millions of ill people and individuals with
    disabilities who need long-term care services are a principal
    factor in increasing the cost of long-term care, not Medicaid.
    Medicaid is, on the contrary, one of the most efficient
    healthcare programs in the country.
        The Governors Association is united in their opposition to
    Medicaid cuts. They recognize that the cuts will seriously harm
    States' abilities to provide the care that we as a
    compassionate society need to offer. We should be helping both
    the people who depend on the program, as well as ensuring that
    the States which manage the program are not harmed by decisions
    made here.
        Aside from public financing, there is also an insurance
    industry out there selling long-term care insurance. While they
    may be providing a vital and important service, we need to
    avoid the mess we found ourselves in with the Medigap policies
    of the late 1980's. I do not want to be sorting through stories
    of unscrupulous insurers confusing and scaring beneficiaries
    into buying expensive policies that do little. I support long-
    term care insurance as an option, but there must be adequate
    protections with standardized policies and consumer
    protections, such as inflation protection, non-forfeiture
    provisions, and a minimum daily option for some. But some is
    the key word, whether through partnership programs with
    Medicaid or by itself, long-term insurance is not appropriate
    for millions of low and modest income families that are already
    finding it difficult to secure food, shelter, transportation,
    and healthcare, along with saving for retirement or education
    of their children.
        Also, notably, creating incentives for the purchase of
    long-term care insurance may do little to alleviate the waste
    on public programs today. We need to develop a coherent long-
    term care policy that preserves and expands the safety nets of
    today, not cuts them.
        I want to thank you, Mr. Chairman, and all of my
    colleagues, and the witnesses for their participation in this
    important hearing, and I hope that we will, from it, be able to
    begin to make some judgments about where our priorities should
    be.
        Thank you, Mr. Chairman.
        Mr. Deal. The Chair recognizes Mr. Ferguson for an opening
    statement.
        Mr. Ferguson. Thank you, Mr. Chairman, and thank you for
    calling this hearing, which will shed some light on an issue
    that requires urgent attention as a new generation of
    Americans, the baby boomers, grow closer to retirement age, and
    the Medicaid program continues to hemorrhage money.
        Medicaid, as it stands right now, is financially
    unsustainable, and without true reform, the Medicaid program
    may not be around for those in future years for those who
    really need it. Today, we are looking at the issue of long-term
    care, an inevitability that many of us will rely upon in our
    later years, and a segment of our healthcare system which is
    draining billions of dollars from our Federal programs.
        Long-term care services are a huge segment of our Nation's
    healthcare spending, totaling $157 billion in 2002,
    representing 12 percent of all personal healthcare
    expenditures, but that total spending amount is expected to
    increase, as more people reach retirement age than there are,
    proportionally, younger workers to pay for and take care of
    their needs. The result is that public and private spending for
    long-term benefits for the elderly could double from 2000 to
    2025, even assuming no expansion in benefits.
        And increasingly, Medicaid has been relied upon to serve as
    a safety net for people requiring long-term care. In fiscal
    year 2003, Medicaid paid about $83.8 billion for long-term care
    services, almost doubling from 10 years ago. These dollars
    primarily paid for institutional care and care in home and
    community-based settings.
        Congress has made strides in addressing the issue of long-
    term care, but there is still a long way to go. For example, in
    2000, Congress authorized a new grant program under the Older
    Americans Act, to provide information and assistance to
    caregivers, counseling, respite and other home and community-
    based services, to families caring for their frail older
    members.
        We need to look further into alternatives to the current
    system, including building upon past reforms, encouraging long-
    term care insurance, and closing loopholes that people use to
    take advantage of Medicaid and other Federal programs. Thank
    you again, Mr. Chairman, for holding this important hearing,
    and I look forward to working with you, and I appreciate our
    witnesses for being here today, as we look to reform long-term
    care in our country.
        I yield back.
        Mr. Deal. I thank the gentleman. The Chair recognizes Mr.
    Waxman for an opening statement.
        Mr. Waxman. Thank you, Mr. Chairman, and I want to thank my
    colleague, Ms. Baldwin, for allowing me to go before her,
    because I have to go to another hearing, but I appreciate that
    we have a chance to hold this hearing with the pair of docs
    that sits before us, a pair of doctors, Dr. McClellan and Dr.
    Holtz-Eakin, but we do have a paradox, and that is what are we
    going to do with the long-term care for elderly and disabled
    people?
        Medicaid has served as a safety net for those very
    vulnerable people, and it is important that we continue the
    Medicaid program to serve that purpose until such time as we
    have an alternative. One alternative that obviously would have
    made sense would have been a social insurance system. Everybody
    would have paid into it, and then everybody who needs it would
    have it available. Most people are not going to need nursing
    home care. Others are looking at private long-term care
    policies, and I think that is a direction that we are probably
    going to be taking more and more.
        The Federal Government now offers that to Federal
    employees, but as Mr. Dingell pointed out, we have got to make
    sure that these policies meet some kind of standards, because
    people can buy a policy, and find that they don't have much of
    anything if there is no inflation protection and otherwise. But
    Medicaid serves this important purpose now, to fund the safety
    net for those who desperately need it.
        Now, I think all of us would like to see alternatives, in
    terms of letting people stay in the community and not go into a
    nursing home. Long-term care is not just nursing home care, and
    perhaps we can come up with some agreement along those lines.
    But I want to say one thing that should be very clear. For
    those who think that having a Medicaid program is the reason we
    have people without insurance is just absolutely absurd. It is
    only recently that insurance products have even been available,
    and we don't yet even have the standards to apply to those
    policies across the board.
        I am also in strong disagreement with people who want to
    say that we should punitively go after seniors and force them
    to take out reverse mortgages, so that they should go out and
    then use that money to buy health insurance, long-term care
    policies. I don't know at what point you are going to do that
    in people's lives, but if you are going to do it at the point
    where they need nursing home care because they have less than
    $2,000 in assets, that is--that doesn't make any sense at all.
        Many States can go after the house afterwards, and some, in
    fact, do that. There should be a role for both private and
    public approaches to helping people with long-term care needs.
    I think we can look to see how to make the program better. But
    I think this is a program that is going to need more money, not
    less, and I hope we are not going to have people who voted for
    the instructions for conferees on the budget to say that there
    should not be a cut in Medicaid, turn around now and slash $10
    or $20 billion of the Federal dollars for the Medicaid program,
    because making a policy in that context will certainly lead to
    disaster.
        Thank you, Mr. Chairman.
        Mr. Deal. The Chair recognizes Mr. Bilirakis for an opening
    statement.
        Mr. Bilirakis. Thank you, Mr. Chairman, and I, along with
    you and the others, do want to welcome Dr. McClellan and Dr.
    Holtz-Eakin here today, and we apologize for your sitting there
    as long as you are just listening to us, gibberish up here, but
    in any case, thanks for being here, to you and all the other
    witnesses.
        Mr. Chairman, we know that the escalating costs of long-
    term care is a very personal issue that has profound public
    policy implications. The CBO Office estimates that total
    spending on long-term care exceeded $200 billion last year,
    nearly a quarter of which was financed through the Medicaid
    program.
        These costs are expected to rise substantially in the
    future as the need for long-term care grows with an ever
    increasing elderly population. The consequences of surging
    long-term care costs are significant for States and the Federal
    Government. Medicaid is becoming an increasing portion of
    Federal and State budgets, crowding out other important
    priorities. In my State of Florida, the Medicare spending
    accounts for $14 billion, almost one quarter of the State's $57
    billion budget. Florida spent more than $3 billion on long-term
    care through Medicaid last year, which will consume more than
    half of the State's budget in just 10 years at its current
    growth rate, and I think we all would agree that this growth is
    simply unsustainable.
        The Florida Governor, Jeb Bush, has proposed an innovative
    approach to Medicaid reform, and already has developed programs
    through federally approved waivers to improve the management
    and coordination of long-term care and encourage home and
    community-based service programs. Other Governors, as we know,
    are experimenting with alternatives to meet the needs of their
    Medicaid populations.
        Congress must act to help Florida and other States better
    control their Medicaid programs, and provide them the
    flexibility they need to meet the demands of the increasing
    number of Americans who receive long-term care services through
    Medicaid.
        Mr. Chairman, Medicaid is a partnership. It is a
    partnership with the States. And whatever we do, we should not
    do and ignore, completely ignore what the States' wishes might
    be in that regard. We have got to sit down with them around a
    table and work it out together. We have to examine how to
    provide incentives to encourage people, especially younger
    generations, to plan for their future care. There is so much
    that we have to do, and I have a statement here, Mr. Chairman,
    I would like to put into the record, but I would basically say
    that first of all, for over the last 2 years, we had a
    taskforce from this subcommittee, which has been working on
    this subject. It was not done with the idea of tying it into
    budgets or budget decreases, or anything of that nature. It was
    done because we all felt that we have got to bring Medicaid up
    to par with what is happening today, and what the States'
    demands are.
        And if this committee wants to reform Medicaid in such a
    way that it is not going to hurt the people who need it, that
    it will preserve the dignity of those who need long-term care
    services, et cetera, we can do it, if we put aside
    partisanship, and if we are willing to sit around a table and
    work together on a plan that will really work and not hurt
    those that really need it.
        Thank you, Mr. Chairman.
        Mr. Deal. I thank the gentleman. The Chair recognizes Ms.
    Baldwin.
        Ms. Baldwin. Thank you, Mr. Chairman, and I thank all of
    the witnesses, both first and second panel, who will be
    testifying this afternoon. I look forward to engaging in an
    informative discussion about the options before us as a
    Congress and as a country.
        Many of my colleagues, in their opening statements, have
    shared their personal accounts, probably because all of us
    learn a lot more about long-term care through those very
    personal experiences we have than we do in any hearing room or
    briefing. I still recall a moment where I was sitting in a
    chair besides my grandmother's hospital bed, my grandmother who
    raised me since I was 2 months old, and hearing from the
    doctor, well, we need to discharge her, but she is not ready to
    go home yet, and you learn a lot about our long-term care
    system through those personal experiences. And through my
    grandmother, as her primary caregiver during her last years, I
    learned a lot about what many millions of American families
    struggle with, caring for someone with increasingly demanding
    needs, the painful decisions that families need to make when a
    loved one needs more care, or ultimately, to move into a
    nursing home, and about the financial stresses that are faced
    writing those very big monthly checks for nursing home care.
        So I am pleased that this committee is taking up this very
    important issue. I think we have a real opportunity here to
    make some critical adjustments to Medicaid that will strengthen
    the program for future generations. As we consider the various
    options before us as a Congress and a country, I hope we keep
    numerous considerations in mind, but specifically, furthering
    our efforts to help States provide long-term care in the least
    restrictive setting possible, and strengthening consumer
    protections for those who do purchase long-term care insurance.
        Again, I look forward to today's witnesses and discussion,
    and thank the witnesses for their testimony and their patience.
        Mr. Deal. The Chair recognizes the chairman of the full
    committee, Mr. Barton, for an opening statement.
        Chairman Barton. Well, thank you, Mr. Chairman, for holding
    this hearing. I think this is one of the critical hearings we
    are going to have in this subcommittee this year. I want to
    thank our two witnesses that are here before us, and then the
    panelists that are on the next panel.
        I just met with the five Directors of the Children's
    Hospitals in Texas, one in San Antonio, one in Houston, one in
    Dallas, one in Fort Worth, and one down in the Valley. And they
    all told me that 70 percent of their patient load is paid by
    Medicaid. These are our children. Medicaid was set up 30, 35
    years ago to take care of low income, indigent healthcare for
    our population, but what has happened is it has become a
    surrogate for long-term care for our seniors. Two-thirds of our
    dollars in Medicaid are going for long-term healthcare in
    nursing homes, which means the group that I just met with are
    having to scramble to fund care for our younger low income and
    indigent population, and if we don't take care of them at that
    age, they become a bigger and bigger burden as they progress,
    as they grow up.
        So this hearing today is to try to see if there is not some
    way to at least begin a dialog about long-term healthcare, and
    find out if there is not some way to take it off the backs, or
    at least relieve the burden on Medicaid, so we free up dollars
    to help the people that I was just visiting with from the
    Children's Hospitals of Texas. This country has not wanted to
    address the issue of long-term healthcare. The last time we
    talked about it on the floor of the House, I believe Claude
    Pepper of Florida was still chairman of the Rules Committee,
    and he actually brought to the floor a long-term healthcare
    bill, and we may have even implemented it briefly and then
    repealed it. I could be corrected on that if that didn't
    happen.
        So this is the beginning of a dialog in the House, at
    least, on the substance of long-term healthcare, which means
    Medicaid reform, and I hope some time this summer, we can find
    some consensus and decide to do more than hold a hearing,
    because it is very, very important. And I am going to close,
    Mr. Chairman, with reading a paragraph from the committee staff
    memo that was put out for this hearing. It says: ``Long-term
    care is one of the most significant demographic and physical
    challenges of this century, and of particularly importance
    because of our rapidly aging population. In 2000, there were an
    estimated 9.5 million people with long-term care needs in the
    U.S., including 6 million elderly and 3.5 million non-elderly.
    These numbers are projected to grow dramatically in the coming
    years, especially after 2030, when the baby boom generation
    begins to reach 85.'' Just parenthetically, I will be 80, if I
    am lucky enough to be alive in 2030. ``The senior population,
    12.6 percent in 2000, is projected to rise to 20.5 percent by
    2040. The fastest growing share, 85 plus, is projected to rise
    from 1.6 percent to 3.8 percent. This population, which is most
    likely to need long-term care, is projected to more than triple
    from 4 million to 14 million nationally.''
        So it is very important, Mr. Chairman, that we begin this
    dialog, and hopefully find some consensus on solutions to it.
    And again, I want to thank you for the hearing, and I want to
    thank our two witnesses before us right now, and then the
    panelists on the second panel.
        [The prepared statement of Hon. Joe Barton follows:]

     Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy
                                  and Commerce

        Thank you, Chairman Deal, for holding this important hearing today.
    I also want to thank all of our witnesses for their testimony, which
    will provide valuable perspectives on the crisis facing long-term care
    financing.
        I begin with a quote: ``Although Medicaid was originally designed
    to provide health care to low-income women and children, it has become
    our country's ``de facto'' payer of long-term care for the elderly and
    disabled . . . 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.''
        I'd like to take credit for such astute observations, but credit
    goes to Sen. John Breaux who made this statement more than three years
    ago as Chairman of the Senate Special Committee on Aging. His call to
    action was timely then and critical now.
        Public spending on long-term care and Medicaid generally is growing
    at an unsustainable rate. There just are not enough taxes or taxpayers
    to keep it going without bankrupting the budgets of working families,
    not to mention the national economy. Medicaid is already the biggest
    item in state budgets, exceeding elementary and secondary education
    combined. Unreformed, analysts predict Medicaid will bankrupt every
    state in as little as 20 years--absorbing 80-100% of all state dollars.
        At the moment, Medicaid accounts for more than 40% of total long-
    term care spending and nearly half of spending for institutional care.
    Medicaid long-term care costs account for one-third to one-half of
    total Medicaid expenditures in most states and about half of Medicaid
    long-term care spending is for the elderly.
        The senior population--12.6% in 2000--is predicted to rise to 20.5%
    by 2040; the fastest growing share, 85+ (``the oldest old'') is
    projected to rise from 1.6% in 2000 to 3.8% in 2040: this is a 42%
    increase in the population most likely to need long-term care.
        We need to understand the relationship between the availability of
    Medicaid and long-term care planning: Why do so few people plan ahead
    if long-term care costs can be so devastating and Medicaid is a welfare
    program meant only for the poorest among us? We need to learn what can
    be done promote greater accountability and encourage individuals with
    sufficient resources to take responsibility for planning for their
    future health care needs. I look forward to hearing our witnesses'
    opinions on these important questions.
        It is also clear that current efforts aimed at estate recovery
    neither encourage long-term care planning nor result in appreciable
    recovery of funds for Medicaid. We may need to look at making changes
    to the rules created under OBRA '93, but rarely enforced by states, to
    impose consequences on states that fail to comply with these
    requirements. We also need to examine new ways to bring home equity
    into the financing equation on the front-end--to forestall or at least
    minimize reliance on public funding.
        In the final analysis, Comptroller General David Walker got it
    right when he testified in 2002: ``Only if the limits of public support
    are clear will individuals likely take steps to prepare for a possible
    disability.'' We have not done a very good job at making this
    distinction and the public should not be faulted for responding
    rationally to the complex and confusing financing structure that we
    allowed to develop. We must provide clarity before the care needs of 77
    million baby-boomers overwhelm our ability to provide a safety net for
    the truly needy--for whom Medicaid was originally intended.
        There are serious challenges facing Medicaid today, long-term care
    financing among them, and the program is clearly at a crossroads. I
    hope some of the suggestions our witnesses offer today will help the
    Committee as we plan to move forward with Medicaid reform. We need to
    look for innovative bipartisan solutions for the problems facing
    Medicaid in order to strengthen and improve the program. Medicaid
    beneficiaries deserve nothing less. So do America's taxpayers.

        Mr. Deal. I thank the Chairman. The Chair recognizes Ms.
    Capps for an opening statement.
        Ms. Capps. Thank you, Mr. Chairman. As we can tell from the
    opening statements, most of us agree that the growing cost of
    long-term care in Medicaid is a rising challenge. And thank you
    for being here for the hearing, those of you who are
    presenting. We should be looking at some of the various ideas
    out there to improve long-term care and sustain Medicaid
    support for it.
        I believe we need to be careful that we do not too hastily
    embrace proposals which would harm those who need care or waste
    taxpayer dollars, and we should also be careful not to jump to
    conclusions that are not supported by evidence. Many proponents
    of change claim that wealthy seniors in large numbers are
    gaming the system and stealing from Medicaid. They argue that
    we must make dramatic changes to asset transfer limits in order
    to cut back on these practices. But there is, to my knowledge,
    nothing but anecdotal information to support these claims.
        GAO has reviewed this issue twice since 1993, and found
    little evidence to support it, and the proposals they have put
    forward might catch some people who are, indeed,
    inappropriately receiving benefits, but they would certainly
    deny care to many elderly or disabled Americans who are
    impoverished, who desperately need and depend upon coverage.
    This would certainly save the Federal Government money, but at
    what cost to families struggling to support loved ones who need
    long-term care? We should measure the cost of this effect on
    families, on wage earners who must stop working in order to
    care for elderly and other, and on and on.
        Perhaps there is evidence out there, but it should be
    produced before we make drastic changes, and the changes we
    make should fit the problem. Some people are expressing
    interest in expanding the use of long-term care insurance. That
    approach might have some merit, but there are some pitfalls we
    must avoid as well. There must be adequate consumer protections
    put in place to ensure that the elderly and disabled are not
    abused, and real savings to Medicaid needs to be demonstrated.
    CBO estimates that expanding the current long-term care
    partnership program would end up costing the Federal Government
    $45 million over 10 years. Frankly, any savings that were
    derived would probably not materialize for decades, since the
    purchasers of long-term care insurance won't need coverage
    until they are much older. I am not saying that we shouldn't do
    this, but we should be aware of what we are getting into when
    we do.
        Finally, I will say I am pleased with the administration's
    attention to encouraging community-based care for the elderly
    and disabled. When you see bright spots of this kind of
    continuity of care of communities, you realize that this is
    certainly our goal, to have it be seamless across the Nation.
    But the attention that the administration is giving is at odds
    with the billions of dollars in cuts that are being asked for
    in the budget. Community care, when possible, is far better for
    beneficiaries than being in an institution, but sometimes it
    costs more, and cutting Medicaid now will only stifle efforts
    in this direction.
        For example, my colleague from Nebraska, Mr. Terry, and I
    have introduced legislation to increase wages for direct
    support personnel under Medicaid, sorely needed, but the
    obstacles facing this bill right now, and other improvements to
    Medicaid, are going to be made all the more difficult by the
    cuts the budget that we just voted for, the vote that we took
    yesterday in the House, from the budget framework. So we have
    our challenges now, and I hope that we can find ways to truly
    improve Medicaid, and not resorting to the arbitrary cuts.
        I yield back the balance of my time.
        Mr. Deal. The gentlelady's time has expired. Mr. Gillmor.
    Anyone on the majority side wish to make an opening statement?
    Mr. Shadegg.
        Mr. Shadegg. Thank you, Mr. Chairman. I do want to make an
    opening statement. I want to thank you for holding this
    hearing, and I want to thank our witnesses, both on this panel
    and on the subsequent panel.
        As a number of our colleagues have correctly pointed out,
    both long-term care and Medicaid pose significant demographic
    and important fiscal challenges to us as a Nation. It is
    important that we examine those challenges, and that we address
    them in a way that best serves all Americans.
        It is our responsibility to make sure that Medicaid works
    and provides both quality care and does so at a reasonable
    expense. In this regard, I am pleased to highlight a model that
    we should at least be looking at, because I believe it can
    work. Arizona has been a pioneer in this area. More than 20
    years ago, my State embraced the Federal waiver process to
    create a viable alternative to traditional Medicaid. It created
    what is called the Arizona Health Care Cost Containment System,
    AHCCCS, which has been recognized for its success in providing
    high quality medical care and also controlling costs. Building
    off the AHCCCS program, we also, in 1988, created the Arizona
    Long Term Care System, which currently enrolls more than 40,000
    individuals, and greater than 90 percent of those individuals
    report either being satisfied or very satisfied with the care
    that they are getting.
        I believe that the success of both of these programs,
    AHCCCS and ALTCS, is in part due to their flexibility, and in
    part due to the benefits they provide. Individuals can choose a
    service provider, which then works with them to select the
    level of service needed, and importantly, the setting in which
    that service will be provided, including home-based care.
    Regular monitor, case management, and member satisfaction
    surveys are critical components of this system. In addition to
    being supported by the enrollees, the program has achieved
    substantial savings. A CMS study evaluated the program and
    determined that the Arizona system had saved 16 percent of the
    costs that would have been incurred if Arizona's program had
    been traditional Medicaid. Another study found that the Arizona
    model provided savings equal to roughly 35 percent of nursing
    home costs that would have been incurred without the program.
        I think it is important that we remember there are examples
    out there where we can produce both quality care and savings,
    and I compliment you, Mr. Chairman, on holding these hearings.
    I encourage the committee to look at the Arizona model, not
    necessarily as perfect, but as at least one which sets the goal
    of both maintaining and actually vastly improving the quality
    of the system, while also achieving savings. And with that, Mr.
    Chairman, I yield back.
        Mr. Deal. I thank the gentleman. Mr. Rush.
        Mr. Rush. Thank you, Mr. Chairman, and I also want to
    welcome both the witnesses on this panel and the following
    panel.
        Mr. Chairman, I must start off by saying that I disagree
    with the premise of this hearing. The Medicaid program does not
    need the types of ``reforms'' many of the detractors of the
    program would suggest. Why is it that Medicaid needs--what
    Medicaid needs is the political will of this Congress to step
    up to the plate and fund a vital safety net program that cares
    for our most vulnerable population.
        Mr. Chairman, why is it that this Congress only has a taste
    for reform when it involves programs for the poor, the
    disabled, and the elderly? Why is this Congress' zeal--where is
    this Congress' zeal when it comes to spiraling drug costs, or
    when it comes to the spiraling budget score of the recently
    passed Medicare prescription drug bill? Why don't we call for
    reform in the spiraling taxpayer subsidies to corporate
    interests in our recently passed Energy Bill, of course, which
    I voted for.
        Why doesn't this Congress take on reform when it comes to
    the escalating costs in the occupation of Iraq, or our tax code
    where corporations hide their funds in overseas tax shelters?
    It seems that this Congress is very selective in its zeal for
    reform, and it is always reserved for matters affecting the
    poor and the vulnerable.
        Having said that, I want to further highlight a particular
    reform that I find to be completely outrageous and a blatant
    attack on working class and middle class families, and that is
    requiring them to take out reverse mortgages in order to pay
    for their long-term healthcare costs. The House of
    Representatives just passed a bill that repeals the estate tax
    to the benefit of the very wealthiest Americans. Proponents of
    this repeal argue that no matter how rich you are, your assets
    should automatically be passed on as you see fit without giving
    one cent to the Federal Government. Working class and middle
    families did not benefit from this repeal at all, because their
    assets have never met the threshold of the estate tax. It is
    bad enough that these families did not benefit from this
    repeal, but now, we have proposals floating around that will
    require or encourage them to actually liquidate and use up the
    only asset that they have, and that is their home.
        The reason for this convoluted version of class warfare,
    well, because Congress doesn't want Medicaid to pay for their
    long-term care. They want working and middle class citizens to
    pay themselves with literally their only asset, their homes. It
    is an absurd proposition, and it is unconscionable.
        Mr. Chairman, I am not an ideologue. I am a pragmatist and
    I am a humanist, and I am tired of hearing about proposal after
    proposal that only targets the most vulnerable members of our
    society. I am tired of calls for reform that fall squarely on
    the shoulders of many of my constituents. It is my hope that we
    want to control costs and institute meaningful reforms, and
    this committee will look elsewhere.
        Thank you, and I yield back the balance of my time.
        Mr. Deal. The Chair would ask unanimous consent that Ms.
    Wilson, a member of the full committee, be allowed to
    participate with an opening statement, and in questioning,
    following members of the subcommittee. Without objection, so
    ordered. Anyone else on the majority side wish to make an
    opening statement? Anyone on the majority side? If not, I will
    go to Mr. Green.
        Mr. Green. Thank you, Mr. Chairman, and I would like to
    welcome Dr. McClellan. As Congressman Waxman said, our pair of
    docs are here, but again, those of us who are from Texas who
    live in Washington a lot of time kind of get homesick every
    once in a while. I hope you get to go home.
        Mr. Chairman, I want to thank you and our ranking member
    for holding this hearing on long-term care and Medicaid. The
    hearing coincides with what may be happening this week on the
    Budget Committee negotiations about the level of the Medicaid
    cuts that will be included in the budget conference report.
    Since it is one of our first hearings on the Medicaid issue, I
    want to express my opposition to any legislative attempts to
    balance the budget on the backs of the Medicaid program.
    Medicaid is not the source of our budget problem. Medicaid is
    not the driving force behind the increasing healthcare costs in
    our country.
        Just to put the program's costs in perspective, between
    2000 and 2004, employer-sponsored health insurance premiums
    rose 12.6 percent. Medicare's costs rose 7.1. During that same
    time, Medicaid's cost grew only 4.5, despite the fact that
    Medicaid witnessed a 23 percent increase in its beneficiary
    population. If Congress is going to deal with our country's
    budget problems, it shouldn't do so by placing a bulls-eye on
    the back of the Medicaid program, which has kept cost growth
    remarkably low despite a tremendous increase in demand.
        Ultimately, our committee will be charged with finding the
    cuts in Medicaid, as outlined in the final budget resolution,
    which is why it is important for us to have an in-depth
    examination of the aspects of the Medicaid program. I
    appreciate our witnesses coming to testify today, both our
    first panel and the second panel, and look forward to their
    recommendations on long-term care policies. In my home State of
    Texas, one in nine Texans are on Medicaid. Under the
    President's budget, Texas would lose $2.4 billion over 10 years
    in Federal Medicaid contributions, the third largest loss by a
    State following New York and California. A cut this large puts
    our States in a no-win situation, forcing them to make painful
    cuts to optional Medicaid services. And Texas, again, doesn't
    participate in a lot of the optional Medicaid services. With 90
    percent of the Medicaid long-term care spending considered
    optional, the accessibility and quality of long-term care will
    surely decline under these cuts, and contribute to the
    tremendous suffering among our vulnerable populations.
        Again, Mr. Chairman, I am glad we are holding our first
    hearing, and if we are going to get the marching orders, I
    would hope we would look at it very judiciously on where we are
    going to cut the programs in Medicaid. And I share the
    Chairman's concern about our children's hospitals, but I also
    know that Medicaid has not been the big cost increase that we
    have seen, and I will yield back my time.
        Mr. Deal. Anyone else wish to make an opening statement?
    Ms. Wilson.
        Ms. Wilson. Thank you, Mr. Chairman. Thank you for holding
    this hearing, and thank you for graciously allowing me to
    participate as well. I think that long-term care is the biggest
    challenge that we face in Medicaid, and it is a challenge
    today, but it is even more of a challenge in the future, when
    we see our population age.
        Medicaid and long-term care in Medicaid covers a variety of
    populations. It is not only seniors. It is the adult disabled,
    and it is medically fragile children in our foster care
    systems. And it is an extremely important safety net for many
    Americans. There is, within Medicaid, a prejudice toward
    institutional care, when none of us want to spend our days in
    an institution if we can stay at home, and yet, Medicaid favors
    that kind of care, and in many cases, you need an exception to
    the Federal rules to stay at home rather than go to a nursing
    home. Seventy percent of our nursing home beds are paid for by
    Medicaid, and our insurance on long-term care insurance
    policies and laws are not aligned with statutes on Medicaid. It
    is very hard to encourage somebody, to convince somebody they
    should buy something like long-term care insurance, when they
    can get it for free. We need to align these policies, and long-
    term care in Medicaid is in need of reform.
        At the same time, we underpay for the quality of care we
    want our parents to have in Medicaid, and shift the costs to
    others, and encourage nursing homes, or look the other way when
    they cut corners, because we are not paying for the quality
    that we demand on the regulatory side. All of us in this room
    know, and most of us who have listened to radio or television
    also know that there is a subspecialty of the bar on how to
    divest yourself of your assets and qualify for Medicaid, how to
    protect your kids' inheritance and still get the nursing home
    coverage paid for.
        We cannot afford for middle and upper income Americans to
    give away their assets while we are underpaying for the quality
    of care that low income Americans deserve. That is why this
    system needs reform. I think we need a national strategy on
    long-term care, particularly for seniors, that aligns our
    policies on insurance and in the tax code with what we do on
    Medicaid.
        We also have to include a component of education, so that
    people understand the potential and the cost of long-term care.
    Most Americans, I think, figure that--think that Medicare will
    cover them in a nursing home, and it doesn't for long-term
    care, and we need to dispel those misperceptions. I think we
    need a national strategy on long-term care. I expect to be
    introducing some legislation in this area, but I also think we
    need broader consensus, which is why I have proposed a national
    commission to address and give us some big ideas for how we can
    address this, both at a Federal level and integrated with State
    policy.
        And again, Mr. Chairman, thank you for allowing me to
    participate.
        Mr. Deal. I believe that concludes our opening statements.
        [Additional statement submitted for the record follows:]

        Prepared Statement of Hon. Paul E. Gillmor, a Representative in
                        Congress from the State of Ohio

        Thank you, Mr. Chairman for holding this important hearing.
        With a generation of baby boomers growing older, life expectancy on
    the rise, a shrinking labor force, and smaller family units, the demand
    for long-term care is likely to increase, producing an even further
    strain on our nation's Medicaid program. Absent future demographic
    realities, there no question that Medicaid is in dire need of
    transformation now.
        Today, it is safe to say that a majority of states are experiencing
    skyrocketing Medicaid costs coupled with declining revenues. I think
    that we can also agree that long-term care services represent a lion-
    share of these costs.
        In my home state of Ohio, despite recognizing the reality of a
    broken system and enacting a number aggressive cost containment and
    budget strategies, Medicaid expenditures are increasing at twice the
    rate of growth of state revenues, amounting to a total $10.5 billion.
    This figure represents over 40% of the state's general revenue fund
    spending and is larger than Ohio's entire state budget in 1987.
        Furthermore, Ohio's long-term care consumers comprise 24% of the
    entire population served by the state's Medicaid program, yet they
    gobble-up 74% of the Medicaid spending.
        In response, the Ohio Commission to Reform Medicaid was formulated
    in December 2003, and earlier this January, they released their
    recommendations. I applaud Ohio's efforts, and would bring the public's
    attention to its four primary long-term care recommendations:
        Ensure access to a wide array of long-term care service and
    financing options in home and community-based settings or in
    institutions.
        Ensure that the elderly and disabled, their families and/or
    caregivers have easy, immediate access to a full range of cost-
    effective options and needed information about long-term-care options,
    especially in a crisis situation.
        Encourage personal choice and responsibility for long-term care by
    modifying estate and asset recovery, as well as state funding policy.
        Create a cost-efficient long-term care system with consolidated
    budgets, data collection and planning.
        With the evolution of Medicaid over the years, reform ideas have
    come and passed, or simply been swept under the rug. We must take hold
    of today's circumstances and remain committed with our governors to
    transforming our system into one of personal responsibility, quality
    and efficiency, for our citizens that need it the most. I welcome the
    well-balanced panel of witnesses, look forward to their testimony,
    again thank the Chairman, and yield back the remainder of my time.

        Mr. Deal. Gentlemen, we are pleased to have both of you
    here today, and Dr. McClellan, the Administrator of CMS, I will
    recognize you for 5 minutes for your remarks.

      STATEMENTS OF MARK B. McCLELLAN, ADMINISTRATOR, CENTERS FOR
       MEDICARE AND MEDICAID SERVICES; AND DOUGLAS HOLTZ-EAKIN,
                 DIRECTOR, CONGRESSIONAL BUDGET OFFICE

        Mr. McClellan. Thank you, Chairman Deal, Congressman Brown.
        It is a privilege to be here this morning to talk about
    long-term care and the need for transformation of the Medicaid
    program. Medicaid is the largest source of public funding for
    long-term care in the country. It is and must remain an
    essential lifeline for the most vulnerable Americans, but that
    lifeline is threatened, and it is falling behind today.
        We must ensure that those who need Medicaid assistance with
    long-term care services are protected by benefits that reflect
    the best and latest evidence on how to get quality results in
    long-term care. At the same time, we must also encourage and
    support those who are capable of paying for their own care to
    plan ahead, so they can maintain control without requiring
    substantial public funding.
        And I would like to say a little bit more about both of
    these goals. As you all have pointed out, State and Federal
    financing of long-term care is growing rapidly, and it is a
    significant challenge as our population ages. At the same time,
    long-term care has been changing, but Medicaid has not kept up.
    As you all have said, Medicaid needs to keep pace with the
    growing long-term care needs of the aging population that wants
    to remain as active and engaged as possible, and increasingly
    can do so. Institutional care remains an essential part of
    long-term care today, and it can be the best approach for
    people with a disability who can't be cared for safely and
    effectively in other settings. Indeed, we have seen important
    innovations in nursing home care, and improvements in quality
    in recent years, as part of our Nursing Home Quality
    Initiative, which involves collaboration with States and
    consumer advocates in the nursing home industry.
        But Medicaid was designed at a time when long-term care was
    very different than it is or should be today. When Medicaid
    started in 1965, long-term care generally meant institutional
    care, and so a nursing home benefit was, and continues to be, a
    mandatory benefit under Medicaid. But thanks to progress and
    the support of technology, and good ideas on how to support
    people with a disability, long-term care has changed
    substantially, so that many types of services can be provided
    as effectively or more effectively, and at the same or lower
    cost in a beneficiary's home or community.
        You can think about it this way: If Congress were to create
    the Medicaid program in 2005, you would have to get a waiver
    and go through extensive regulatory hurdles if a State wanted
    to provide a benefit with institutional care only. It is time
    to update the Medicaid program to reflect this reality. It is
    time to end the institutional bias in the Medicaid statute by
    giving beneficiaries the control they deserve, and to enable
    Medicaid to serve more people without spending more money.
        Because Medicaid has not kept up with the progress in long-
    term care, most Medicaid beneficiaries today don't have the
    opportunity to choose how and where they want to receive long-
    term care services. We can't afford to do this any more, either
    from the standpoint of quality long-term care or from the
    standpoint of cost. Beneficiary control means better quality
    and more people served for the same or lower cost.
        In its current form, though, the Medicaid program doesn't
    allow such flexibility. States have the option to provide home
    and community-based services through waivers, but they are not
    required to do so, and in fact, they have to go through a
    process to provide these services. As a result, there is an
    institutional bias that many Medicaid programs have that often
    keeps Medicaid beneficiaries from choosing how to get their
    support. We have made progress to address this with the
    President's New Freedom Initiative, and it is time to take
    further steps.
        The administration's budget includes a package of six New
    Freedom Initiative proposals, including the centerpiece of our
    community-based proposals, Money Follows the Person. That is
    our Medicaid strategy. We want more money going to where it can
    make the most difference, redirecting it. That is what our
    budget proposals are all about, not about cuts. It is about
    putting the money where it can make the most difference. The
    Money Follows the Person initiative authorizes $350 million in
    each of 5 years for a total of $1.75 billion.
        Several States have already implemented similar programs.
    We have heard from members in Texas. We heard about the program
    in Arizona, mentioned by Congressman Shadegg. These programs
    save money. They increase quality. They get more people into
    the community. We also need to improve the financing of long-
    term care and encourage Americans to plan for their future. To
    make sure Medicaid remains secure and sustainable, we need to
    take steps to help individuals who can contribute to their
    long-term care costs to do so, and then, we need to concentrate
    our Medicaid funds on people who have no alternatives.
        Our budget proposal to reform transfer of asset
    requirements is one part of this process. At the same time, we
    also need to help individuals take more control of their long-
    term care needs when they have the means to do so, through
    options like long-term care insurance and reverse mortgages.
    The Partnership for Long-Term Care, which is available in four
    States, is a joint venture between Medicaid and long-term care
    insurers to create affordable products that encourage people to
    self-insure and protect a substantial portion of their assets
    at the same time. It gives individuals full control over how
    they receive long-term care services, and that reduces costs
    for the Medicaid program.
        This program works. In the partnership States, people who
    purchase long-term care insurance almost never end up needing
    Medicaid assistance for long-term care costs. We also need to
    encourage people to learn about reverse mortgages, which will
    allow homeowners to convert a portion of their equity in their
    home into financial support for long-term care services where
    they want them, including in their home. We need to encourage
    them to learn about it. That is not the same thing as a
    requirement.
        Medicaid's current system of covering long-term care is out
    of date, yet it is one of the largest and fastest-growing
    sources of funding for long-term care for the elderly and
    people with a disability. That is not a sustainable
    combination. We are at a crossroads. To improve quality in
    Medicaid, to help Medicaid dollars go further, we need to give
    people with a disability control of their long-term care
    services, in Medicaid and through private sources of financial
    support.
        Mr. Chairman, we look forward to working with you to
    strengthen Medicaid and enable the program to provide better
    support for the millions of Americans who count on it, and I
    want to apologize for the statement getting to you late last
    night. I would like that written statement read into the
    record, along with my remarks. This is an especially important
    issue, about which we have been talking to you and your staffs,
    and I was especially encouraged by the statements from both
    Republicans and Democrats this morning, that there is a real
    opportunity to get an agreement on improving Medicaid and the
    way it supports long-term care. So we absolutely want to be
    closely engaged with you on this critical issue this year.
        [The prepared statement of Mark B. McClellan follows:]

      Prepared Statement of Mark B. McClellan, Administrator, Centers for
                         Medicare and Medicaid Services

                                  INTRODUCTION

        Chairman Deal, Congressman Brown, distinguished members of the
    subcommittee, thank you for inviting me here today to discuss long-term
    care and the need for transformation in the Medicaid program. There are
    a number of public programs that play a role in our long-term care
    system. Medicare plays a major role, but Medicaid is the largest public
    source of funding for long-term care in the United States. It is, and
    must remain, an essential lifeline for the most vulnerable Americans.
    In 2000, Medicaid paid for 45 percent of the total amount spent on
    long-term care services in the United States. State and federal
    financing of long-term care costs is a significant issue both for state
    and federal budgets. In FY 2004, total federal and state Medicaid
    expenditures on all long-term care reached $100.5 billion and accounted
    for 35.7 percent of all Medicaid spending.
        Spending by the federal government and states for long-term care
    services through Medicaid has been growing rapidly. This growth in
    long-term care expenditures will continue to increase as our population
    ages. At the same time, Medicaid needs to keep pace with the long-term
    care needs of an aging population that wants to remain as active and
    engaged as possible. Medicaid should ensure that people with a
    disability are able to contribute to society to the greatest extent
    possible. With the growing demands on Medicaid, we cannot afford to
    wait to take steps that contribute both toward improved quality of life
    for more people with a disability and toward the long-term viability of
    the program. It is critical for us to respond to these challenges by
    ensuring that those who cannot afford to pay for long-term care
    services are protected by benefits that reflect the best and latest
    evidence on how to get quality results in long-term care, while
    encouraging and supporting those who are capable of paying for their
    own care to plan for their future in a manner that gives them control
    and does not require substantial public funding.
        For all of these reasons, it is critical to give Medicaid
    beneficiaries and their family members and caregivers more control over
    how they get their care. As I will describe in more detail, properly
    done, beneficiary control means better quality and more people served
    for the same or lower cost. In its current form, however, the Medicaid
    program does not generally allow such flexibility. Reflecting the
    delivery of long-term care in institutions when the Medicaid statute
    was enacted in the 1960s, the Medicaid program does not rely on the
    community-based long-term care that best meets beneficiaries' needs.
    Long-term care in 1965 was centered on institutions, while today it
    should be focused more on the person and the supports and services the
    person needs. Care in a nursing home is the best option and the
    preferred option for many Medicaid beneficiaries, especially with
    recent quality improvement initiatives undertaken by many nursing
    homes. But progress over the last several decades in supportive
    technologies and ideas for supportive care means that the decision
    about how to receive long-term care services should be a personalized
    decision for the beneficiary. Because the Medicaid program has not kept
    up with progress in long-term care, thousands of Medicaid beneficiaries
    today do not have the opportunity to choose the most appropriate place
    for receiving long-term care services. It is time to give beneficiaries
    the control they deserve to enable Medicaid to get much better value
    for its money.

    Medicaid is Currently the Primary Public Program for Financing Long-
            Term Care
        For beneficiaries in the Medicaid program, most of their long-term
    care services, including medical and non-medical care, are provided by
    Medicaid. Most long-term care is intended to assist individuals with
    activities of daily living, such as getting in and out of bed, eating,
    bathing, dressing, and using the bathroom. It may also include care
    that most people do themselves, such as using eye drops or oxygen, and
    taking care of colostomy or bladder catheters. These services may be
    provided in either institutional or community-based settings.
        Unlike Medicaid, Medicare does not cover most long-term care
    services. Medicare pays only for medically necessary skilled care in a
    nursing facility or home that is needed to treat, manage, observe, and
    evaluate care. Generally, under Medicare, post-acute skilled care is
    available only for a short time after a hospitalization and
    beneficiaries must meet certain conditions for Medicare to pay.
    Examples of skilled care include intravenous injections and physical
    therapy. Medicare skilled nursing care and home health aide services
    are only covered on a part-time or ``intermittent'' basis as part of
    the home-health benefit.

    Eligibility for Medicaid Long-Term Care Varies by State
        States have considerable discretion in determining who their
    Medicaid programs cover and the financial criteria for Medicaid
    eligibility. As a result, income and asset eligibility tests vary by
    state. However, to be eligible for matching federal funds, states are
    required to provide Medicaid coverage for most individuals who receive
    federally assisted income maintenance payments, as well as for certain
    related groups not receiving cash payments. States also have the option
    of providing Medicaid coverage for other ``categorically needy'' and
    ``medically needy'' individuals. The medically needy option allows
    States to extend Medicaid eligibility to additional qualified persons
    who may have too much income to qualify under the mandatory or optional
    categorically needy groups, but have significant medical expenses. The
    medically needy option allows individuals to ``spend down'' to Medicaid
    eligibility by incurring medical and/or remedial care expenses to
    offset their excess income, thereby reducing it to a level below the
    maximum allowed by that State's Medicaid plan.

    Medicaid Coverage of Long-Term Care is Out of Date
        When Medicaid started in 1965, institutional care was the norm for
    long-term care services; thus, a nursing home benefit was and continues
    to be a mandatory benefit that states must provide. States have the
    option to provide home- and community-based services through waivers,
    but they must develop and submit a waiver, and obtain support in the
    state for the waiver implementation, in order to provide these
    services. As a result, there is an institutional bias in many Medicaid
    programs that often keeps Medicaid beneficiaries from choosing where
    they receive long-term care support and services. Institutional care
    remains an essential part of long-term care today and may be the best
    approach for a portion of the elderly and individuals with disabilities
    who cannot safely be cared for in other settings, especially with the
    improvements in quality and capability that have occurred in recent
    years in many nursing homes. Those individuals who need the specific
    types of medically intensive, skilled services nursing homes provide,
    and an even larger number of their family members, friends, and
    relatives, must be able to count on nursing homes to provide such care
    reliably and with consistently high quality. For this reason, to help
    beneficiaries who need nursing home services get better care CMS has
    undertaken some major quality reporting and quality improvement
    initiatives, which are discussed later in this testimony.
        Today, however, institutional care is only one part of a range of
    long-term care options that should be available to Medicaid
    beneficiaries. This is especially urgent because so many Medicaid
    beneficiaries would prefer to receive their long-term care supports and
    services in home-or community-based settings. Not all individuals
    currently cared for in nursing homes need or want that type of
    institutional care. In spite of the bias in the Medicaid statute, we
    have worked hard with advocacy groups, states, and our other partners
    to expand consumer options with regard to home- and community-based
    services. The key concepts here are consumer choice and control. By
    working to give individuals choice and control over supportive services
    in the community, the home- and community-based waivers that we have
    implemented in some states have simultaneously increased personal
    autonomy while promoting better decision-making about supports and
    services. These programs have shown that, often, the most cost-
    effective place to provide care is where most people would prefer to
    receive their care: living in their homes, connected to their
    communities, surrounded by friends and family. And that means better
    outcomes without higher costs in Medicaid--a result that we cannot
    afford to pass up any longer.

    Medicaid's Long-Term Care System Must Change
        Mr. Chairman, to ensure Medicaid can serve more beneficiaries at a
    lower cost, the institutional bias in Medicaid long-term benefits
    resulting from lack of beneficiary control must be addressed. CMS has
    been working hard to promote consumer choice and home- and community-
    based services over institutional care when it is appropriate for
    beneficiaries. Both consumers and states are very receptive to this
    approach, and the evidence from the programs developed so far is that
    it is a win-win effort.
        The progress we have made with the President's New Freedom
    Initiative (NFI) points us in the right direction. We have undertaken a
    number of efforts to rethink, redesign, and re-balance a program that
    has traditionally been institutionally biased. The President's FY 2006
    Budget includes NFI legislative proposals to make this happen. The
    President's Budget requests $385 million in budget authority for FY
    2006 and $2.2 billion in budget authority for the five-year budget
    window. We made inroads with this legislation in Congress last year,
    and this year we want to work with Congress to go further and enact the
    proposed legislation.

    Medicaid Proposals in the President's Budget Would Improve Long-term
            Care Services
        CMS plays a unique role in identifying and supporting effective,
    innovative state Medicaid reforms that save money and maintain and, in
    some cases, substantially improve quality of care and quality of life.
    The President's FY 2006 budget includes several policies to promote
    home- and community-based care options. These policies, including the
    Money Follows the Person Demonstration, build on the President's New
    Freedom Initiative, which is part of a nationwide effort to integrate
    the elderly and people with disabilities more fully into society.

    The New Freedom Initiative Promotes Independence and Choice
        The President's New Freedom Initiative represents an important
    commitment toward ensuring that all Americans have the opportunity to
    develop skills, engage in productive work, choose where to live, and
    participate in community life. The President's Initiative, which we are
    working to implement throughout the government, is about the promise of
    freedom for every elder and person with a disability. It is a promise
    of independence, choice, and dignity. Our goal with our long-term care
    initiatives is to work with states to get to the point where consumer
    choice is the norm in our long-term care system--including in Medicaid.
    The budget includes a package of six New Freedom Initiative legislative
    proposals, including the centerpiece of our community-based proposals,
    Money Follows the Person, which promote home- and community-based care
    options for elders and people with disabilities.

    Money Follows the Person Promotes Community-Based Living
        As part of the New Freedom Initiative legislative package, the
    President's FY 2006 budget authorizes $350 million in each of five
    years, a total of $1.75 billion over five years, for the Money Follows
    the Person demonstration. In the initiative, the federal government
    will pay the full first-year cost, with no state match required, for a
    package of home- and community-based services for eligible individuals
    who move from institutions into the community and after the first year
    costs will be shared with the states at the existing Federal Medical
    Assistance Percentage (FMAP) rate. This will assist states in their
    efforts to reorganize and rebalance their long-term care service and
    support programs and integrate this demonstration into the Medicaid
    program. We believe individuals and families make better decisions for
    themselves than the current institutional-based, provider-driven
    systems.
        While states are making efforts to develop infrastructures designed
    to support community-based services, progress in reducing dependence on
    institutional care has been difficult to achieve due to the fiscal
    challenges states are facing. The initiative will help states achieve a
    more effective balance between the proportion of total Medicaid
    spending on institutional services and the proportion of funds used for
    community-based support in their state plans and waivers. States will
    be encouraged to develop and adopt a coherent strategy for reducing
    reliance on institutional-care. The initiative also will help states
    design flexible financing systems for long-term services and supports
    that allow funds to move with the individual beneficiary's preferences
    to the most appropriate and preferred setting as the individual's needs
    and preferences change.
        Earlier we said the 100 percent FMAP assists states. Again, for
    individuals who move voluntarily from a Medicaid-certified institution
    to the community, in this five-year demonstration project, the Federal
    government will fully reimburse states for one year of home- and
    community-based Medicaid services for such individuals. At a minimum,
    the package of services available in the community must be equivalent
    to the services that a state could provide under a Medicaid waiver.
    After the initial year, a state will be reimbursed by the Federal
    government for services provided at FMAP rates. States must commit to
    serve Medicaid eligible demonstration participants for as long as they
    need home- and community-based services.
        CMS is one of five sponsors for the HCBS clearinghouse website for
    the Community Living Exchange Collaborative. The clearinghouse is
    intended to facilitate sharing information, tools, and practical
    resources across states and local entities based on information from
    grantees, states, academic institutions and others. For example,
    Medstat, a contributor to HCBS.org, highlighted several promising
    practices in the Money Follows the Person initiative, including those
    discussed below. As a result of the Real Choice Systems Change grants,
    states have made steps in making home- and community-based services
    available to individuals, and the following state examples illustrate
    the progress we have made.
        Texas--The Texas legislature added Rider 37 to the two-year state
    appropriations act that took effect in September, 2001. This rider
    allows the Texas Department of Human Services (TDHS) to move Medicaid
    funding from its nursing facility budget to its budget for state and
    Medicaid-funded home and community-based services (HCBS) when a
    Medicaid participant transitions from a nursing facility into a
    community-based residence. Any Medicaid nursing facility resident may
    apply for transition into the community and immediately use community
    supports, rather than be placed on a waiting list as was required
    before the rider. Each month TDHS identifies people who left nursing
    homes using the rider and estimates the cost of their community
    services for the rest of the fiscal year. TDHS moves the cost of the
    community services from the nursing home budget to the community
    supports budget. Over 1,900 Medicaid participants in Texas have
    transitioned from nursing facilities into the community under Rider 37.

    The Texas legislature extended the rider for a second biennial budget
    (until August, 2005).
        Maine--To ensure people know about their options before entering a
    nursing home, Maine required pre-admission screening and periodic
    reassessment for all nursing home residents, regardless of the payment
    source. Maine also implemented a case-mix payment system for Medicaid
    nursing facilities and tighter Certificate of Need controls on nursing
    home growth. The state rapidly expanded HCBS options and encouraged
    development of more community residential care. Between 1995 and 2002,
    the number of Medicaid nursing home residents in Maine decreased 18
    percent while the number of people receiving Medicaid and state-funded
    home and community-based services increased 78 percent. The proportion
    of state and Medicaid long-term support spent on HCBS increased from 16
    to 39 percent. Total long-term care expenditures increased by only 17
    percent over the seven-year period.
        Indiana--In 2002, Indiana began an initiative to provide HCBS to
    people at imminent risk of nursing facility admission. Area Agency on
    Aging case managers work with hospital discharge planners to identify
    hospital patients who may be admitted to a nursing facility from the
    hospital. The case managers offer these people home and community-based
    services options. Some people use community supports immediately after
    their hospital discharge, while others use the services after a short
    nursing facility stay. Since 2002, Indiana has diverted 1,400 persons
    from institutional care.
        Oregon, Washington, and Wisconsin--Oregon, Washington, and
    Wisconsin have taken a systems approach to rebalancing their long-term
    care systems and allowing the Medicaid funding to follow the person's
    preferences. These systems approaches to rebalancing combine
    legislative action, market-based approaches, and linkages. For example,
    Oregon and Washington established a single long-term care budget and
    Wisconsin passed legislation to create an entitlement to home- and
    community-based services in counties with the Family Care services
    benefit. In addition, these states made market-based changes (such as
    the institution of single point of entry and preadmission screening) to
    ensure that persons in need of long-term care are quickly identified,
    assessed, and informed of long-term options. In Oregon and Washington
    linkages were formed to merge administrative and regulatory
    responsibilities at the state and local level. In Wisconsin over half
    of the membership of state and local governing councils and boards is
    held by program participants. As a result of these systemic changes,
    over half (57 percent) of Oregon's Medicaid long-term care spending for
    seniors and adults with physical disabilities is devoted to home- and
    community-based care. And in state fiscal year 2002, Washington served
    almost two and a half times as many participants in the community as
    they served in nursing facilities.

    Home- and Community-Based Care Demonstrations Provide More Options
        The FY 2006 budget includes proposals to encourage home- and
    community-based care for children and adults with disabilities, such as
    demonstrations to provide respite care for caregivers of adults and
    children. Another demonstration will evaluate the effectiveness of
    providing home- and community-based alternatives to psychiatric
    residential treatment for children enrolled in Medicaid.

    Presumptive Eligibility will Help Beneficiaries in Transition
        To reduce the prevalence of individuals entering nursing facilities
    from hospitals due to the length of time required to determine Medicaid
    eligibility for home- and community-based services, the President has
    proposed to offer states the option of providing those individuals who
    need Medicaid home- and community-based care with services for up to 90
    days while Medicaid eligibility is being determined. Under this
    proposal, the Federal government will pay its share of the first 90
    days of home- and community-based services whether or not the
    individual is ultimately deemed eligible for Medicaid.

    Existing Initiatives Demonstrate Success of Home- and Community-based
            Long-Term Care
        CMS is putting a lot of effort into identifying and supporting
    effective, innovative state Medicaid reforms that improve quality of
    care and quality of life for the same or lower Medicaid costs. It is
    the most effective way not only to make Medicaid sustainable, but also
    to improve the quality of life of our beneficiaries. There are several
    existing initiatives underway, which are helping the elderly and people
    with disabilities live meaningful, productive lives in the community,
    including the Real Choice System Change grants, Independence Plus
    Initiative, and home- and community-based waivers, all of which are
    discussed below.

    Real Choice System Change Grants Foster Choice
        While Real Choice System Change grants have provided much evidence
    of the success of home- and community-based services, it is time to
    shift resources and move ahead with more systematic, large-scale
    reforms such as the multibillion dollar Money Follows the Person
    initiatives in the FY 2006 Budget. We have learned much from the 238
    grants in the Real Choice Systems Change grants program, totaling $188
    million, to help states and others develop programs that allow the
    elderly and individuals with disabilities to live meaningful,
    productive lives in the community. These grants are intended to foster
    the systemic changes necessary to allow elders and those with
    disabilities to access quality services from their choice of providers
    in accordance with their living preferences and priorities. Including
    the states we highlighted earlier as good examples for progress in
    Money Follows the Person activities, CMS has partnered with every state
    in the nation, the District of Columbia, and the U.S. territories to
    provide these grants from which we have developed new innovative ways
    to rebalance the Medicaid system. As shown in the state examples
    earlier, with this support, states are continuing to address issues
    such as personal assistance services, direct service worker shortages,
    transitions from institutions to the community, respite service for
    caregivers and family members, and better transportation options. CMS
    has also implemented an ambitious national technical assistance
    strategy, including the Community Living Exchange Collaborative
    mentioned earlier, to share information and support states' efforts to
    improve community-based service systems and enhance employment
    supports.

    Independence Plus Initiative Increases Choice and Control
        In 2002, CMS launched the Independence Plus Initiative to afford
    Medicaid participants increased choice and control that results in
    greater access to community living. Independence Plus is based on the
    experiences and lessons learned from states that have pioneered the
    philosophy of consumer directed care. The Initiative expedites the
    process for states to request waiver or demonstration projects that
    give individuals and their families' greater control over their own
    services and supports. Independence Plus programs not only deliver
    service in the community setting, but also allow a growing number of
    individuals and their families to decide how best to plan, obtain, and
    sustain the services that are best for them, giving beneficiaries the
    opportunity to control how they should receive the services they need.
    The Independence Plus programs allow participants to design a package
    of individualized supports, identify and attain personal goals, and
    supervise and pay their caregivers. CMS has approved eleven
    Independence Plus waivers, including eight 1915 (c) IP waivers (New
    Hampshire, Louisiana, South Carolina, North Carolina (2), Maryland,
    Delaware, and Connecticut) and three ``1115'' IP waivers (California,
    and two others that are extensions of the original ``cash and
    counseling'' demonstration waivers in Florida and New Jersey).
        Independence Plus programs have built on the very successful ``Cash
    and Counseling'' demonstrations. The Cash & Counseling Demonstration
    and Evaluation Program is a three-state experiment to determine the
    feasibility of offering a cash payment option in lieu of traditional
    agency services to recipients of personal assistance services. The
    demonstration enables people to hire whomever they want to provide
    their care by redirecting personal assistance funds to the consumers
    themselves (instead of to agencies). There are three original Cash and
    Counseling section 1115 demonstration programs (Arkansas, New Jersey,
    and Florida), two other states with section 1115 self-direction
    demonstrations similar to Cash and Counseling (Oregon and Colorado),
    and a multitude of states that offer self-directed program options
    under their section 1915(c) home and community based waivers.

    Home- and Community-Based Waivers offer Alternatives to Institutional
            Care
        Home- and community-based service (HCBS) waivers show that Medicaid
    can be an effective source of support for community living. Using HCBS
    waivers, states can provide alternatives to institutional care by
    allowing beneficiaries to live at home, where they can enjoy family,
    neighbors, and the comfort of familiar surroundings. States can only do
    this as long as the waiver remains budget neutral, meaning that the
    costs of providing services under the waiver do not exceed the costs
    that would be incurred if the services were provided in an institution.
        Vermont and New Hampshire illustrate how institutional and home-
    and community-based care can lead to different results. Vermont has a
    highly developed home- and community based health care system. New
    Hampshire continues to rely on institutional care. In Vermont, 85
    percent of the Medicaid population over age 65 still lives at home. In
    New Hampshire, only half can live at home. As a result, Vermont spends
    less than half as much per elderly person on Medicaid as New Hampshire,
    permitting more people to get the better results.
        The trend towards home- and community-based care is rapidly
    increasing. The numbers tell the story very clearly: state and federal
    expenditures on long-term care have increased from $13.9 billion in FY
    2001 to an estimated $20.7 billion in FY 2004. And over that period
    from 2001 to 2004, a total of $68.7 billion has been spent to support
    home- and community-based waivers generally. More money has been spent
    in those four years than was spent during the previous eight years
    combined [$56.6 billion]. Taking further steps to incorporate HCBS-
    based approaches into the Medicaid program will provide further
    momentum for this important trend.

    Transition/Diversion Grants Awarded
        When individuals try to move out of an institution for a more
    independent life, they may need assistance with certain one-time
    expenses, such as security deposits and essential household
    furnishings. In May 2002, CMS announced a clarification in policy to
    allow home- and community-based waivers to cover transition costs. In
    addition, CMS granted funds to states in support of these transition/
    diversion activities. To date, approximately 2,300 individuals have
    been transitioned from, or diverted from, nursing homes into the

    community with this grant assistance from CMS.
    Resources and Support for Obtaining Effective Long-Term Care Services
        CMS and the Administration on Aging (AoA) launched the Aging and
    Disability Resource Center (ADRC) Program in 2003. The Program provides
    competitive grants to states to assist them in developing and
    implementing ``one stop shop'' access to information and individualized
    advice on long-term support options, as well as streamlined eligibility
    determinations for all publicly funded programs. The long-range goal is
    to have ADRCs serve as ``visible and trusted'' places at the community
    level nationwide where people of any age, disability, or income can get
    information on all available long-term support options. The program
    also reduces government fragmentation, duplication, and inefficiencies.
    To date, 24 states have received grants to begin implementing ADRC
    pilots; another 18 to 20 states will receive grants in FY 2005.

    Promoting Personal Responsibility and Planning for Long-Term Care
            Expenses
        In addition to making more home- and community-based long-term care
    options available, we need to improve the financing of long-term care
    and encourage Americans to plan for their future. For Medicaid to
    remain sustainable for those who truly need it, we must ensure that
    Medicaid does not become an inheritance protection plan for those who
    can pay for their own long-term care. The CMS budget proposal to reform
    transfer of asset requirements is one part of this process.
    Furthermore, we also need to help individuals take advantage of private
    financing options to help pay for their long-term care, including long-
    term care insurance and reverse mortgages. Finally, support for
    education and planning about long-term care is needed, and CMS is
    working in conjunction with other components of HHS and other
    organizations to conduct outreach and to educate people about their
    long-term care options. CMS continues to work to identify ways to help
    people take more control of their future long-term care service and
    support needs, when they have the means to do so.

    Reforming Transfer of Asset Requirements will Preserve Program Dollars
            for those in Need
        The budget proposes to strengthen existing requirements for asset
    transfers as one element of a broader approach to promote personal
    responsibility and planning to meet long-term care expenses. To qualify
    for Medicaid long-term care services, an individual may only retain
    nominal assets. Current law requires individuals applying for Medicaid
    long-term care services to spend all but a minimum level of assets
    before becoming eligible. However, creative estate planning often
    allows individuals to become eligible for Medicaid legally, without
    spending their own available assets for needed care first. Several
    states are developing initiatives to curb this practice.
        To help Medicaid funds go further for the beneficiaries who have no
    alternative source of support, the Administration's proposal would
    enable states to require more individuals to pay for some period of
    long-term care before Medicaid would pay the bill. This would be
    accomplished by changing the asset transfer penalty period. Currently,
    when an individual who applies for Medicaid has transferred assets at
    less than the fair market value within the three year look-back period,
    the amount of those assets are used to determine a period of
    ineligibility for long-term care services under Medicaid. However, the
    penalty period for such asset transfers currently begins on the date of
    the asset transfer. The result is that even for assets transferred
    within the look-back period, the penalty period is over before the
    individual requires long-term care services or applies for Medicaid.
        This proposal would change the penalty period to the date when an
    individual is enrolled in Medicaid and is receiving long-term care
    services either in an institution or, in certain circumstances, in the
    community. This would make it less likely that individuals could plan
    ahead and transfer their assets, so that the penalty period expires
    prior to their needing long-term care.

    Partnerships Instead of Asset Transfers for Sustainable Use of Long-
            Term Care
        In effect, Medicaid today acts as a long-term care insurance policy
    for most people, not just those who lack the means to provide for their
    own long-term care needs. This is perhaps one reason that Medicaid
    coverage is often limited in quality and in scope: by providing access
    only to certain kinds of institutional care, for example, Medicaid may
    be used more as coverage of last resort. Although the specific coverage
    varies by state, Medicaid programs generally do not cover assisted
    living, and only some programs cover adult day care, both of which are
    coverage options in long-term care insurance policies. And as I have
    already discussed, many Medicaid programs limit coverage in the
    community. Supporting alternatives to Medicaid funding like long-term
    care insurance may consequently promote the availability of more
    community-based services in Medicaid. At a minimum, such steps would
    help make sure that more beneficiaries who really need Medicaid help
    would be able to obtain it. Long-term care insurance can help pay for a
    broad array of long-term medical and non-medical care, such as help
    with activities of daily living, that people with a disability often
    prefer to the limited Medicaid benefits.
        The Partnership for Long-term Care is a very promising approach to
    this policy challenge, formulated to explore alternatives to current
    long-term care financing by blending public and private insurance. This
    blend provides an alternative to individuals either spending down all
    their assets or transferring all of their assets in order to qualify
    for Medicaid. The partnership between Medicaid and long-term care
    insurers is currently permitted to operate in only four states.
        The four Partnership States--California, Connecticut, Indiana and
    New York--have focused on creating affordable products that encourage
    people to insure themselves for at least some of the long-term care
    costs they might incur, and that enable purchasers to obtain better
    protection against impoverishment, and that reduce long-term care costs
    for the Medicaid program. In these states, private insurance is used to
    cover the initial cost of long-term care. Consumers who purchase
    Partnership-approved insurance policies can become eligible for
    Medicaid services after their private insurance is utilized, without
    divesting all their assets as is typically required to meet Medicaid
    eligibility criteria.
        Although people in these states who buy long-term care insurance
    policies almost never have significant Medicaid spending, Congress has
    prohibited such Partnerships. The President's budget proposes to
    eliminate the current legislative prohibition on developing more
    Partnership programs.

    Reverse Mortgages can Help Individuals Pay for Long-Term Care
            Expenditures
        A reverse mortgage is a special type of home loan that lets an
    elderly homeowner convert a portion of the equity in his or her home
    into cash. The equity built up over years of home mortgage payments can
    be paid to the elderly homeowner. But unlike a traditional home equity
    loan or second mortgage, no repayment is required until the
    mortgagor(s) no longer uses the home as their principal residence.
    Funds obtained from reverse mortgages can be used by elderly home
    owners to pay for long-term care services and supports as well as other
    needs. It is estimated that forty-five percent of households at
    financial risk for ``spending-down'' to Medicaid could take advantage
    of a reverse mortgage to help them pay for long-term support. On
    average, these households could expect to get $62,800 from a reverse
    mortgage. More widespread use of this financial option for long-term
    support services could potentially result in Medicaid savings.
        The US Department of Housing and Urban Development's (HUD) Home
    Equity Conversion Program (HECM) of reverse mortgages provides these
    benefits. It is federally-insured by FHA and funded by lending
    institutions such as mortgage lenders, banks, credit unions, and
    savings and loan associations. To obtain a HECM reverse mortgage, an
    individual must be 62 years of age or older, own their home outright or
    have a low mortgage balance that can be paid off at the closing with
    proceeds from the reverse loan, and the home must be the individual's
    principal residence. The HECM reverse mortgage loan becomes due when
    the mortgagor dies (and there is no surviving mortgagor), the mortgagor
    sells the property, or the mortgagor no longer occupies the home as the
    principal residence.
        Alternatively, an individual can obtain a reverse mortgage from the
    private reverse mortgage market. At the same time, such an individual
    can use the proceeds of the private reverse mortgage to buy a reverse
    annuity. This has the same requirements as a reverse mortgage. In such
    cases, when the individual sells his home, no longer lives in the home
    permanently, or dies, the individual or estate will have to repay the
    money received through the reverse mortgage (whether it was in the form
    of an annuity or otherwise), plus applicable interest and fees, from
    the proceeds of the home's sale.

    CMS Is Expanding Efforts to Educate Americans About Long-Term Care
            Planning
        Better understanding and support for long-term care planning can
    help lead to more private support and thus more Medicaid sustainability
    and personal control. To help provide this support, the Own Your Future
    Campaign was launched in 2004 to encourage more people to plan ahead
    for their long-term support needs. The project is a joint effort of
    CMS, AoA, the Assistant Secretary for Planning and Evaluation, the
    National Governors Association, and the National Conference of State
    Legislatures. It has been piloted in five states (Arkansas, Idaho,
    Nevada, New Jersey, and Virginia) and involves the use of various
    outreach techniques, including the targeted mailing of HHS materials
    and a letter from the Governor of each state to every household headed
    by an individual between the ages of 50 and 70. The letter includes a
    toll free number people can call to request a Long-Term Care Planning
    Tool Kit that covers a wide range of topics. Over 2 million letters
    have been mailed, and preliminary results within 3 months of the
    mailings showed about a 10 percent response rate--significantly higher
    than the 1 to 2 percent rate which is the norm for commercial marketing
    campaigns. We are encouraged by the early results of this campaign and
    will be conducting an evaluation of it to learn more about how best to
    provide this information.

    Quality Improvements will Reduce Costs and Improve Outcomes
        Providing better support for high quality, efficient providers is
    the best way--in fact, I think its the only way--to enable our
    beneficiaries to have access to modern medicine, to continue to get
    improvements in medical care and how it's provided, while ensuring
    continued Medicaid coverage of long-term care whether these services
    are provided in the home or community or in an institutional setting.
    Quality Care must be the Standard in HCBS Programs
        The Administration has consistently worked to ensure that HCBS
    waiver programs allow people the independence to stay in their own
    homes while receiving quality care and support in a community setting.
    In the last three years, CMS has implemented a standard quality review
    protocol for regional office use in monitoring state programs; begun
    the first complete inventory of state HCBS quality assurance and
    improvement techniques; and begun developing a uniform national format
    describing key components of any quality assurance and improvement
    program for HCBS waivers.
        CMS is working with the major state associations, including
    representatives of state agencies for developmental disabilities, head
    injuries, Medicaid, and aging, to assure all our forms and applications
    reflect our focus on quality in HCBS waivers. CMS developed a draft
    revised waiver application for all HCBS waivers, incorporating our
    quality expectations, and is also developing a new state annual report
    form to capture better information about states' quality management
    activities.
        The Administration is committed to providing quality services in
    the home- and community-based setting and continues to engage in
    improving its role to ensure quality outcomes through federal and state
    monitoring.

    Improving Quality in Nursing Homes is an Essential Part of Effective
            Long-Term Care Policies
        Quality improvement also needs to extend to nursing facilities. We
    are working to improve quality while avoiding unnecessary costs and
    expensive, preventable complications for patients in nursing homes
    through the Nursing Home Quality Initiative (NHQI) and the parallel
    initiative known as the ``Quality First'' initiative. Though the NHQI,
    the Quality First Initiative, CMS has published public reporting of
    nursing home and home health quality measures. These initiatives have
    been very successful in measurably improving the quality of care in the
    nation's 18,000 nursing homes in every state and territory. For
    example, data from NHQI indicates that the long-term care prevalence of
    pain has improved every quarter over the last two years in 100 percent
    of states. On average, the prevalence of pain in long-term care
    patients has declined 38 percent over the last two years.
        Another measure of quality in nursing homes is the daily use of
    physical restraints, which has declined in 92 percent of states. On
    average, the daily use of physical restraints has declined by 23
    percent over the last two years. Another measure, the short stay (post-
    acute) prevalence of pain has improved in 96 percent of states. On
    average, the prevalence of pain in short stay residents has declined by
    11 percent.
        Quality improved even more dramatically in those nursing homes
    around the country that partnered more intensively with their state
    quality improvement organizations (QIOs). We strongly encourage nursing
    homes who wish to join in this effort to contact their state QIO to
    learn more about quality improvement programs and to obtain resources
    to help in their quality improvement efforts.
        Although our initial efforts have yielded great results, we still
    have a long way to go. Some quality measures are proving more
    challenging to improve. For example, the pressure ulcer measure has
    remained essentially unchanged nationally over the last two years,
    although a few states now seem to be making some progress on this
    measure.
        And it is important to remember that quality improvement is not a
    static process--for example, we are constantly working to enhance our
    measures and broaden from clinical to patient experience of care and
    systems of care measures. Our goal should be to create an environment
    of continuous quality improvement, of sharing and cooperation among the
    QIOs, State Survey Agencies, nursing homes and professional
    organizations, and even our beneficiaries and their families together
    we create an ``environment of quality.''
        In order to achieve this goal, CMS believes that we will have to
    keep re-examining the way we accomplish our work, and even to re-invent
    the nature of the public-private partnership. The ``Quality First''
    initiative and the National Commission for Quality Long-Term Care are
    examples of reinvigorated new partnerships that can propel the quality
    agenda forward at an ever-increasing pace. To make the participation of
    our partners easier, in December we created the CMS Long-Term Care Task
    Force of the Quality Council. The Long-Term Care Task Force (LTCTF) was
    created to coordinate the long-term care (LTC) program within CMS and
    to serve as an internal advisory panel for the Administrator.

    Helping Beneficiaries Make Informed Choices
        Through NHQI, CMS has expanded its efforts to inform consumers
    about the care available in the nation's nursing homes through the
    Nursing Home Compare Web site at www.medicare.gov. Nursing Home Compare
    web allows consumers to search by state, county, city, zip code, or by
    facility name for information on any of the 18,000 Medicare- and
    Medicaid-certified nursing homes. The web site includes data on the
    facility's care record for regular and complaint surveys, staffing
    levels, number and types of residents, facility ownership, and quality
    measure scores in comparison to state and national averages. Over the
    last two years the number of clinical topics covered by the publicly
    reported quality measures has increased from eight to fifteen. Nursing
    Home Compare is one of the most popular sites on www.medicare.gov,
    receiving an average of 13 million page views in 2004.

    Conclusion
        Mr. Chairman, Medicaid's current system of covering long-term care
    is outdated, yet it remains one of largest sources of funding for long-
    term care for the elderly and persons with disabilities. We are at a
    crossroads. Today, most Medicaid funds for long-term care goes to
    institutional services that are relatively costly on a per-person basis
    and even though beneficiary-controlled services can clearly lead to
    substantial improvements in the quality of life of beneficiaries, and
    even though many elders and people with disabilities who are now in
    institutional care have expressed their clear preference and desire is
    to remain in their own home. To improve quality in Medicaid, to help
    Medicaid dollars go further, and most importantly to give people with a
    disability control of their long-term care services, we need to address
    the institutional bias in Medicaid. We look forward to working with you
    to strengthen Medicaid and enable the program to provide better support
    for the millions of Americans who count on it.
        We know that community-based services are not for everyone and for
    this reason we will continue to ensure quality services are offered in
    institutional settings. However, today we have the opportunity to
    continue the work the President has begun and forward the cause of
    community living for those who prefer it to institutional care. If we
    believe that every American--young and old--has the right to live in
    the community, if we have really learned that this can be achieved, the
    time is now to go farther down the ``road to independence.'' It is time
    for action by Congress to give individuals the choice and control over
    their future that they deserve.
        If Congress were to create the Medicaid program in 2005, extensive
    regulatory hurdles to get a waiver would almost certainly be required
    for a state to provide an institution-only benefit. When we know how to
    make Medicaid better, when we know we can get better results and serve
    more people without spending more money, it is time to change the law
    along the lines of the proposals in the President's FY 2006 budget.
        Thank you, Mr. Chairman, for the opportunity to speak to you today
    about the impact of long-term care on Medicaid costs and the need to
    eliminate the institutional bias in the Medicaid program. I look
    forward to working with you as we move forward with Medicaid reform. I
    would be happy to answer any questions you may have.

        Mr. Deal. Thank you, Dr. McClellan, and Dr. Holtz-Eakin,
    the Director of the Congressional Budget Office. We are pleased
    to recognize you for an opening statement for 5 minutes.

                    STATEMENT OF DOUGLAS HOLTZ-EAKIN

        Mr. Holtz-Eakin. Thank you, Mr. Chairman, Congressman
    Brown, members of the committee.
        The CBO is pleased to have the chance to appear here today.
    We wrote a report on this topic last year, and have submitted a
    written testimony for the record. I will make only a few brief
    points, most of which have already been touched upon and
    expressed probably more eloquently by members in their opening
    statements.
        Point one is that with the demographic change in the United
    States, and the aging of the baby boom generation, it is quite
    likely that we will face a rising demand for long-term care
    services, and along with that will be a rising demand in
    resources to fund these long-term care services from what are
    already substantial levels. We estimate about $200 billion in
    2004 including the value of donated care, this is about $25,000
    per senior with impairments.
        Distributing the burden of those costs is a key aspect of
    both policy design and the long-term budget outlook, and at the
    moment, current financing is heavily influenced by rules that
    do not provide incentives for individuals to make their own
    financial preparations, and if left unchanged, those incentives
    will add to the financial demands on programs in the Federal
    budget at a time when there will be increasing budgetary
    stress.
        So let me walk you through some of the nuts and bolts
    underneath that. First, the costs, if we could go to the first
    slide. The demography, I think, is now familiar to members of
    the committee. We anticipate that in the baseline, the rising
    share of the population that is either 65 and older at the top,
    or 85 and older, the high demanders of long-term care services,
    the bottom line, that rising share of the population in those
    age groups will cause the fraction of our national dollar
    devoted to long-term care to rise from 2 percent now to 2.3
    percent, a rise of about 15 percent, and that is driven by the
    tripling in the share of the population that is 85 years of age
    or older.
        As with most of these long-term projections in the
    healthcare area, this one comes with some uncertainty. A key
    piece of uncertainty here is the rate at which impairment will
    be present in this population. This projection assumes that
    impairment continues to decline at the pace we have seen, about
    6 percent per decade. If that were not to be the case, the
    costs would grow even more rapidly. They would rise by about 65
    percent, something that looks closer to the rise in Social
    Security outlays.
        Step two is to ask how will these costs be financed, and at
    the moment, go to the second slide, we have a distribution of
    these costs in a variety of forms. The dominant form of these
    costs is donated care. Informal care by family members has been
    mentioned by many members of the committee. This is the largest
    form of care. It is very difficult to value. Estimates range
    from $50 to $200 billion. But even for seniors with severe
    impairments, it is the majority of time the case that this is
    their only source of care, so it is an important part of both
    the provision and financing. And the demography may work
    against this in the future. Families are expected to be
    smaller. Patterns of marriage and divorce have made it less
    likely that caregivers may be in the home, and so on both
    fronts, the demography is affecting this piece of the
    financing.
        The second biggest chunk is out-of-pocket self-insurance,
    and there, the key issue will be how many Americans will have
    adequate financial resources to take that as their means of
    meeting the financing burden. A very small private source at
    the moment is private long-term care insurance, as has been
    mentioned in some of the opening statements. This is currently
    about $750 out of the $25,000 per senior, and one of the
    striking features at the moment is the small take-up in private
    long-term care insurance, about 10 percent of folks taking that
    up. And then, the dominant public programs, Medicare at $4,000
    out of the $25,000, and Medicaid, at about $5,500, of which 56
    percent is the Federal Government's share.
        So what issues does this present the committee and the
    Congress going forward? Well, first it is important to remember
    that this will take place in the context of larger budgetary
    demands. In a report that the CBO did in 2003, we documented
    the long-term budget outlook in the health area. If things go
    better than they have for the past three decades, it will be
    the case that Medicare and Medicaid will triple in size. They
    will rise from 4 percent of our national income to 12 percent.
    It is in the context of a great many demands on the Federal
    budget that this problem should be addressed.
        That suggests that one should use dollars wisely, that one
    should balance both within programs, between institutionalized
    care and home-based care for Medicaid, balance between
    programs, who will carry it, between Medicaid and Medicare, and
    it may be the case that it will provide incentives to limit the
    size of the Federal programs, for example, by limiting middle
    income families' eligibility, through spend-down rules or other
    changes.
        It may also be desirable to encourage either greater self-
    insurance, personal saving to cover out-of-pocket costs for the
    private long-term care market. There, there has been some
    research that has tried to understand the relatively low take-
    up of private long-term care insurance, and has focused on the
    degree to which factors such as administrative costs can
    explain that, whether it is premium instability or the
    difficulty of insuring the services when the prices are quite
    hard to forecast. There has been some focus on whether it is
    just adverse selection, only those folks who really know they
    are going to use this insurance buy it, or the degree to which
    the presence of alternative sources of insurance, the public
    programs, Medicaid, or the perceived long-term care benefits in
    Medicare, are the source of crowding out the private long-term
    care insurance market.
        All these are important issues. They will determine the mix
    of financing for what appears to be a rising demand for long-
    term care services in the future, and I thank the committee for
    the chance to be here today, and look forward to answering your
    questions.
        [The prepared statement of Douglas Holtz-Eakin follows:]

      Prepared Statement of Douglas Holtz-Eakin, Director, Congressional
                                 Budget Office

        Mr. Chairman and Members of the Subcommittee, thank you for the
    opportunity to be here today to discuss the cost and financing of long-
    term care (LTC) services. A Congressional Budget Office (CBO) report
    from April 2004, Financing Long-Term Care for the Elderly, examines
    these issues in greater detail. Long-term care is the personal
    assistance that enables people with impairments to perform daily
    routines such as eating, bathing, and dressing. Such services may be
    provided at home by family members and friends; through home and
    community-based services such as home health care, personal care, and
    adult day care; or in institutional settings such as nursing or
    residential care facilities.
        In my statement today I want to make the following points:

     With the aging of the baby-boom generation, the United States'
            elderly population is expected to grow rapidly over the next
            several decades. The surge in the number of seniors will
            increase the number of people with impairments and, in turn,
            the demand for long-term care services.
     The resources devoted to long-term care services are already
            substantial. CBO estimates that spending on such care for the
            elderly (including the value of donated care) totaled over $200
            billion in 2004--or approximately $24,000 per senior with
            impairments. In reporting estimates of LTC spending, CBO chose
            to include the value of donated care because it is an integral
            part of long-term care, even though measuring it accurately is
            difficult.
     Currently, donated care is the largest source of financing for long-
            term care costs, followed by the combined public programs--
            Medicaid and Medicare--and out-of-pocket expenditures. Private
            long-term care insurance is a small portion of the current
            financing.
     Financing patterns for long-term care are heavily influenced by the
            rules governing public LTC programs. Those rules create
            incentives that discourage people from making their own
            financial preparations and encourage them to rely on government
            assistance. If left unchanged, those incentives will add to the
            financial demands that government programs for retirees are
            already facing as a result of demographic changes and rising
            health care costs.

                               DEMOGRAPHIC TRENDS

        The oldest members of the baby-boom generation become eligible for
    early retirement under Social Security in 2008. According to estimates
    by the Bureau of the Census, the number of elderly people (those age 65
    and older) in the United States will increase by two and a half times
    between 2000 and 2050. The share of the population claimed by the
    oldest seniors, those age 85 and older--and those most likely to use
    long-term care--will reach about 5 percent by 2050, more than triple
    the 1.5 percent share they had in 2000 (see Figure 1). By comparison,
    the proportion of the population accounted for by working-age people
    (ages 20 to 64) will grow by only about 35 percent by 2050.
        Although the number of the oldest seniors will rise, declines in
    the prevalence of functional impairment could offset some of the
    effects of that increase. Impairment among seniors appears to have
    waned significantly during the 20th century. From 1910 to the early
    1990s, the overall prevalence fell by about 6 percent per decade. From
    the early 1980s to the present, the prevalence of impairment may have
    fallen even faster, according to research findings from the National
    Long-Term Care Survey. In contrast, some types of impairment, such as
    those requiring the use of a cane to walk, have been increasing.
    Impairment among people under age 65 may also be increasing, which
    could eventually lead to higher future rates of impairment among
    seniors. In fact, one recent study projects that the currently
    declining trend in the prevalence of impairment among seniors will
    reverse in the future, leading to greater rates of institutionalization
    than those that exist today.1 As those conflicting trends
    suggest, projecting the prevalence of impairment in future years and
    basing estimates of spending on those projections are both difficult
    and subject to a high degree of uncertainty.
    ---------------------------------------------------------------------------
        \1\ Darius Lakdawalla and others, ``Forecasting the Nursing Home
    Population,'' Medical Care, vol. 41, no. 1 (2003), pp. 8-20.
    ---------------------------------------------------------------------------
        Demographic changes may affect the composition of LTC financing in
    the future as well. Smaller families, lower fertility rates, and
    increasing divorce rates may make donated LTC services less common in
    the future. The size of the average family has declined, reducing the
    number of adult children available to care for their elderly parents.
    Family size fell from 3.8 members in 1940 to 3.1 members in 2000; if
    current trends continue, it will decline to 2.8 people by 2040. At the
    same time, the rate at which women participate in the labor force will
    probably continue to grow, at least until 2010, further reducing the
    availability of donated care. Those family-related trends, in sum,
    could further stimulate the demand for formal, or paid, services.

                      SOURCES OF LONG-TERM CARE FINANCING

        Long-term care is financed with both private resources and public
    programs (see Figure 2). Private resources include donated care, out-
    of-pocket spending, and private insurance. Public programs include
    primarily Medicaid and Medicare, although the Department of Veterans
    Affairs and the Social Services Block Grant program also fund long-term
    care.

    Private Sources
        Most seniors with impairments who reside in the community,
    including those with severe impairments (unable to perform at least
    four activities of daily living, or ADLs), rely largely on donated care
    from friends and family. And many people who pay for care in their home
    also rely on some donated services.
        The economic value of donated care is significant, although
    estimates of it are highly uncertain. In 1998, the Department of Health
    and Human Services estimated that replacing donated LTC services for
    seniors with professional care would cost between $50 billion and $103
    billion (in 2004 dollars). Another analysis, in 1997, estimated the
    value of donated care for people of all ages who had impairments--
    measuring it as the forgone wages of caregivers--at $218
    billion.2
    ---------------------------------------------------------------------------
        \2\ Peter S. Arno, Carol Levine, and Margaret M. Memmott, ``The
    Economic Value of Informal Caregiving,'' Health Affairs, vol. 18, no. 2
    (1999), pp. 182-188. CBO converted their estimate of $196 billion in
    1997 dollars to $218 billion in 2004 dollars.
    ---------------------------------------------------------------------------
        Out-of-pocket spending in 2004 accounted for about one-fifth of
    total LTC expenditures, or roughly $5,000 per senior with impairments
    (see Table 1). The federal government subsidizes a portion of out-of-
    pocket spending through the tax code. Taxpayers with impairments (or
    taxpayers who have dependents with impairments) may deduct LTC expenses
    from taxable income along with other medical and dental costs, but only
    the portion of total medical costs (LTC, medical, and dental expenses)
    that exceeds 7.5 percent of adjusted gross income.
        Private insurance for long-term care is a relatively recent
    development and pays for only a small amount of care at present. Few
    elderly people currently have private coverage--no more than 10
    percent.3 However, that source of financing is growing--
    although the precise extent of the growth is difficult to measure
    accurately. The data on private LTC insurance generally capture
    payments that insurers make directly to providers but do not always
    pick up insurers' reimbursements to policyholders for covered services
    that policyholders initially pay for out of pocket. Thus, estimates of
    LTC insurance payments--and of out-of-pocket spending--should be
    interpreted with caution because the former may be underestimated and
    the latter overestimated.
    ---------------------------------------------------------------------------
        \3\ Jeffrey R. Brown and Amy Finkelstein, The Interaction of Public
    and Private Insurance: Medicaid and the Long-Term Care Insurance
    Market, Working Paper No. 10989 (Cambridge, Mass.: National Bureau of
    Economic Research, December 2004).
    ---------------------------------------------------------------------------
        In 1995, private insurance paid about $700 million for LTC services
    for seniors, or 0.8 percent of all such expenditures. In 2004, such
    spending totaled about $6 billion, CBO estimates, or about 3 percent of
    total expenditures. According to America's Health Insurance Plans, the
    number of policies written yearly increased from about 300,000 in 1988
    to more than 900,000 in 2002 (see Figure 3). About 9.2 million policies
    were sold from 1987 through 2002; roughly 72 percent of them are still
    in force.
        A typical LTC insurance policy pays the cost of nursing home care
    and home and community-based care but specifies a maximum daily benefit
    (such as $100 or $150) and may impose other limits. Policies with so-
    called inflation protection increase the dollar value of their benefits
    by a contractually specified percentage each year, usually 5 percent.
    Although some policies offer coverage for an unlimited period, most
    commonly cover services for a shorter time, such as four years, or
    until benefit payments for a policyholder reach a preestablished
    maximum lifetime amount. Policyholders typically become eligible to
    collect benefits when they reach a specific minimum level of
    impairment, usually defined as being unable to perform two or three
    ADLs or having a cognitive impairment significant enough to warrant
    substantial supervision.
        Premiums for LTC insurance reflect the cost of services and the
    risk that policyholders will require long-term care as they age. In
    2002, the average annual premium for a typical policy with no inflation
    protection or nonforfeiture benefit was $1,337 if the policy was
    purchased at age 65; with those two added features, the premium rose to
    $2,862. Premiums were three to four times higher if the policy was
    purchased at age 79 (see Table 2). The lower premiums offered to
    younger people reflect the lower risk of their requiring LTC services
    at younger ages and the expectation that younger policyholders will pay
    premiums over a longer period than will people who purchase coverage
    when they are older. Thus, the average annual premium for the same
    policy with inflation protection and a nonforfeiture benefit purchased
    by a 40-year-old would be only $1,117 and by a 50-year-old, $1,474.
        In fact, fixed premiums are a key feature of LTC insurance
    policies--that is, the premiums do not increase as the policyholder
    grows older or as his or her health deteriorates, even though the risk
    of requiring services rises. Instead, insurers calculate premiums to
    ensure that the premiums' total, paid over the life of a policy, plus
    the interest that accrues from investing them will be sufficient to
    cover both the claims of the policyholder and insurers' profits and
    overhead costs. However, insurers reserve the right to increase
    premiums for a specific group, or rating class, of policyholders--such
    as all policyholders in a state--if new data indicate that expected
    claims will exceed the class's accumulated premiums and their
    associated investment returns.

    Government Programs
        Medicaid is the biggest government source of payment for long-term
    care. Jointly funded by the federal and state governments, Medicaid is
    a means-tested program that pays for medical care for certain groups of
    people, including seniors with impairments who have low income or whose
    medical and long-term care expenses are high enough that they allow
    those seniors to meet Medicaid's criteria for financial eligibility.
    Within broad federal guidelines, the states establish eligibility
    standards; determine the type, amount, duration, and scope of services;
    set the rate of payment; and administer their own programs. The share
    of each state's Medicaid expenditures that is paid by the federal
    government is determined by a statutory formula; nationwide, the
    federal share of the long-term care portion of Medicaid spending is
    about 56 percent.
        Medicaid generally pays for services provided both in nursing
    facilities and in the home, although the specific benefits that the
    program provides differ from state to state, as do patterns of
    practice, the needs and preferences of beneficiaries, and the prices of
    services. In total, Medicaid's expenditures for long-term care for
    elderly people since 1992 have grown at an average annual rate of about
    5 percent (see Figure 4). CBO estimates that in 2004, Medicaid's
    payments for institutional care for seniors, including both state and
    federal expenditures, totaled about $36.5 billion. Accounting for about
    40 percent of total expenditures on nursing facilities, Medicaid's
    payments cover the care of more than half of all elderly nursing home
    residents.4
    ---------------------------------------------------------------------------
        \4\ See Celia S. Gabrel, Characteristics of Elderly Nursing Home
    Current Residents and Discharges: Data from the 1997 National Nursing
    Home Survey, Advance Data no. 312 (Centers for Disease Control and
    Prevention, National Center for Health Statistics, April 25, 2000). The
    disparity between Medicaid's share of total spending on nursing
    facilities (40 percent) and the proportion of patients covered by
    Medicaid (56 percent) may result from one or more factors: Medicaid's
    low average reimbursement rates; differences between the severity of
    Medicaid enrollees' conditions and the conditions of patients using
    other sources of payment; and enrollees' cost sharing, which counts as
    out-of-pocket spending.
    ---------------------------------------------------------------------------
        Medicaid's expenditures for home and community-based services
    (HCBS), which include home health care, personal care services, and
    spending under HCBS waiver programs, are much smaller than its spending
    for nursing homes--HCBS expenditures constitute only about 23 percent
    of total Medicaid LTC spending. (Under the waiver programs, states have
    the option of providing people with impairments with enhanced community
    support services not otherwise authorized by the federal statutes.)
    Since 1992, Medicaid spending for home-based care for seniors has grown
    faster than spending for institutional care, rising by about 11 percent
    annually, on average, compared with about 3 percent growth for care in
    nursing facilities.
        Many people who are not eligible for Medicaid while they live in
    the community become so immediately or shortly after being admitted to
    a nursing facility because of the high cost of institutional care.
    (Nursing home costs in 2004 averaged about $70,000 annually for a
    private room.) According to a 1996 study, about one-third of discharged
    nursing home patients who had been admitted as private-pay residents
    became eligible for Medicaid after exhausting their personal finances;
    nearly one-half of current residents had similarly qualified for
    coverage.5 Medicaid coverage is especially common among
    nursing home patients who have been institutionalized for long periods.
    ---------------------------------------------------------------------------
        \5\ Joshua M. Wiener, Catherine M. Sullivan, and Jason Skaggs,
    Spending Down to Medicaid: New Data on the Role of Medicaid in Paying
    for Nursing Home Care (Washington, D.C.: AARP Public Policy Institute,
    June 1996). Those proportions differ because discharged residents
    include people who were institutionalized for only a short time, and
    the sample of current residents includes more people who stay for
    extended periods.
    ---------------------------------------------------------------------------
        Medicare, the nation's health insurance program for the elderly,
    covers care provided in skilled nursing facilities (SNFs) and at home,
    but its benefits are designed primarily to help beneficiaries recover
    from acute episodes of illness rather than to provide care for long-
    term impairment.6 Medicare covers up to 100 days per spell
    of illness for SNF care, and the stay must be preceded by a
    hospitalization lasting at least three days. In contrast, Medicare's
    home health benefit, while originally conceived to finance short-term
    rehabilitation, has evolved into what some observers have described as
    a de facto LTC benefit. To be eligible for reimbursement under the home
    health benefit, the beneficiary must be homebound and require
    intermittent care provided by a licensed professional, such as a
    registered nurse or physical therapist. If those conditions are met,
    Medicare will cover services provided by a home health aide, in
    addition to skilled care; aide services are the assistive services that
    typify long-term care.
    ---------------------------------------------------------------------------
        \6\ Medicaid's nursing facility benefit (institutional care), in
    addition to covering skilled care provided in a SNF, also covers
    nonskilled care that may be provided in a SNF or nursing home.
    Medicare's SNF benefit, however, covers only skilled care provided in
    skilled nursing facilities.
    ---------------------------------------------------------------------------
        By CBO's estimate, Medicare's LTC spending for seniors in 2004
    totaled about $16 billion for care in skilled nursing facilities and
    $18 billion for home health care (see Figure 5). Although the program's
    outlays for those categories grew rapidly from the late 1980s to the
    mid-1990s, expenditures actually declined near the end of the past
    decade. A combination of factors was responsible, including changes to
    reimbursement methods imposed by the Balanced Budget Act of 1997,
    increased federal activities to counter providers' fraud and abuse of
    the program's payment systems, and delays in processing claims. CBO
    projects steady growth in spending for SNF and home health care over
    the 2006-2015 period, averaging approximately 5 percent annually.

             ISSUES IN CONTROLLING FEDERAL LONG-TERM CARE SPENDING

        CBO has projected that total LTC expenditures for seniors
    (including the value of donated care) will rise from about $195 billion
    in 2000 (2.0 percent of gross domestic product, or GDP) to $540 billion
    (in 2000 dollars) by 2040, or 2.3 percent of GDP.7 That
    estimate of a relatively modest increase in use of long-term care
    services incorporated the assumption that the prevalence of impairment
    would decline at a rate of about 1.1 percent per year. If impairment
    levels instead remain about the same as they are today, use of services
    will rise faster, to $760 billion by 2040, or about 3.3 percent of GDP.
    Demand for care could be even higher if, as some researchers believe,
    the prevalence of impairment actually increases in the future.
    ---------------------------------------------------------------------------
        \7\ Congressional Budget Office, Projections of Expenditures for
    Long-Term Care Services for the Elderly (March 1999).
    ---------------------------------------------------------------------------
        The current mix of financing for long-term care, in which a
    significant share of financing comes from government programs, adds to
    the pressures that the federal budget will experience with the aging of
    the baby-boom generation. Contributing to the strains that government
    LTC programs will face are incentives created by those programs that
    diminish the attractiveness of using private resources--especially
    private insurance--as a means for seniors to finance their care.
    Changes in those incentives might encourage more people to make their
    own preparations for financing their care rather than rely on
    governmental assistance.
    Direct Approaches to Limiting Federal Spending for Long-Term Care
        One approach to relieving the pressures on federal finances would
    be to directly reduce the role of Medicaid and Medicare, the programs
    responsible for the bulk of government-financed care. The most commonly
    discussed options are tightening the financial qualifications for
    people applying for Medicaid coverage and reducing Medicare's coverage
    of home health care.
        Medicaid's spending for long-term care could be constrained by
    making it more difficult for middle-income people to qualify for
    coverage by spending down their resources. The intent of Medicaid's
    current rules is to restrict applicants to those who are destitute. Yet
    despite that intention, many applicants manage to protect a significant
    portion of their personal wealth and still qualify for Medicaid
    coverage by taking advantage of certain rules regarding the disposition
    of assets, a practice known as Medicaid estate planning. Strengthening
    the rules to reduce the use of such strategies would delay the point at
    which some people became eligible for benefits and would prevent others
    from qualifying. It could also discourage some people from going
    through the application process. However, it is unlikely that imposing
    those additional restrictions would have more than a modest impact on
    Medicaid's expenditures.8
    ---------------------------------------------------------------------------
        \8\ Congressional Budget Office, An Analysis of the President's
    Budgetary Proposals for Fiscal Year 2006 (March 2005). CBO estimated
    that the President's proposal to change the penalty period for illegal
    asset transfers would save $3 billion over 10 years.
    ---------------------------------------------------------------------------
        Medicare's home health care benefit is relatively generous. Once a
    person meets the physical qualifications for coverage, there are no
    copayments or other coinsurance requirements. A modest cost-sharing
    requirement for beneficiaries could decrease the program's LTC
    expenditures because beneficiaries would probably reduce the amount of
    care they used in response to that kind of financial incentive.

    Challenges in Encouraging Private Financing of Long-Term Care
        Future federal spending on long-term care could be lessened by
    encouraging people to rely more on private resources for their LTC
    needs. Out-of-pocket spending and donated care already account for a
    very substantial share of LTC services, but private long-term care
    insurance currently finances very little such care. CBO estimates that
    the proportion of LTC spending that private insurance pays will rise to
    about 17 percent in 2020; that share would be less than the shares of
    either Medicaid or Medicare. Several factors underlie the limited rise
    that CBO projects for the use of private insurance. Some factors affect
    the availability and quality of insurance: they include issues related
    to administrative costs, the instability of premiums, adverse
    selection, and the inability to insure against certain risks unique to
    long-term care. A final factor--the interaction of private insurance
    and Medicaid--is critical in the way it affects demand for private
    insurance.
        Administrative Costs. Administrative costs contribute a substantial
    amount to LTC insurance premiums because most policies are sold
    individually rather than as group (employer-sponsored)
    policies.9 The costs of marketing to and enrolling
    individuals are about double those for groups, for which fixed
    administrative costs may be spread over more people.
    ---------------------------------------------------------------------------
        \9\ America's Health Insurance Plans, Research Findings: Long-Term
    Care Insurance in 2002 (Washington, D.C.: AHIP, June 2004), p. 11.
    ---------------------------------------------------------------------------
        On average, administrative costs as a percentage of premiums are
    likely to fall in the future as group policies make up a larger share
    of the private LTC insurance market. In 2002, group policies
    constituted nearly one-third of new LTC policy sales.10 (By
    comparison, nearly 90 percent of people with private health care
    insurance hold group coverage.11) But group policies are
    accounting for an increasing share of the LTC insurance market, a trend
    that is likely to continue if more employers offer LTC coverage as an
    employee benefit. If employers offer such a benefit, any part of the
    premiums for their employees' LTC coverage that they pay for, like
    their contributions for regular health insurance, is not included in
    employees' taxable income.
    ---------------------------------------------------------------------------
        \10\ America's Health Insurance Plans, Long-Term Care Insurance in
    2002.
        \11\ Carmen DeNavas-Walt, Bernadette D. Proctor, and Robert J.
    Mills, Income, Poverty, and Health Insurance Coverage in the United
    States: 2003, Current Population Reports, Series P60-226 (Bureau of the
    Census, August 2004).
    ---------------------------------------------------------------------------
        Instability of Premiums. Although LTC insurers typically offer
    premiums that do not automatically increase as the policyholder grows
    older or experiences deteriorating health, state insurance regulators
    allow insurers to increase premiums for all holders of a given type of
    policy in a state (known as a rating class) if they find that they have
    miscalculated the expected cost of their claims. Some insurers have
    boosted premiums several times for that reason, leading many
    policyholders to cancel their coverage and in all likelihood deterring
    some potential purchasers from acquiring LTC coverage.12
    However, premiums may be stabilizing: a survey of top-selling LTC
    insurance carriers by the Health Insurance Association of America
    observed fairly steady premium levels from 1997 to 2001 after a
    sustained decline in average premiums from 1990 to 1996.13
    ---------------------------------------------------------------------------
        \12\ Ann Davis, ``Shaky Policy: Unexpected Rate Rises Jolt Elders
    Insured for Long-Term Care,'' Wall Street Journal, June 22, 2000, p.
    A1.
        \13\ Susan A. Coronel, Long-Term Care Insurance in 2000-2001
    (Washington, D.C.: Health Insurance Association of America, January
    2003).
    ---------------------------------------------------------------------------
        Policyholders can obtain some protection against large jumps in
    premiums by purchasing nonforfeiture benefits with their policy. That
    feature enables policyholders who cancel their coverage to recoup from
    the insurer at least some of the premiums they have paid. Nevertheless,
    although policyholders might get a proportion of their premiums back,
    they do not receive the associated returns on the investment of that
    money.
        Adverse Selection. The relative newness of the market for LTC
    insurance and the still fairly small number of policies being sold
    suggest that the market may be affected by adverse selection. People
    who purchase LTC insurance have greater expectations than nonpurchasers
    of using services in the future, and those greater expectations are not
    captured in the information that insurers collect as they enroll
    purchasers of their policies. If insurers believed that adverse
    selection was occurring, it might lead them to set premiums higher than
    a policyholder's health status would suggest so as to incorporate the
    greater likelihood that that policyholder would use the insurance. In
    turn, the higher premiums might deter people who would purchase
    coverage if the premiums reflected their relatively lower expectations
    of using LTC services.
        One recent study suggests, however, that although adverse selection
    does exist in the LTC insurance market, it may not be producing higher
    overall claims costs.14 According to that study, the higher
    costs of policyholders with greater-than-average expectations of using
    services in the future are offset by the lower costs of policyholders
    who are averse to risk and whose probability of using services in the
    future is actually lower than the average for the population at large.
    Because of the market's youth, there are no clear data to resolve the
    question of adverse selection.
    ---------------------------------------------------------------------------
        \14\ Amy Finkelstein and Kathleen McGarry, Private Information and
    its Effect on Market Equilibrium, Working Paper No. 9957 (Cambridge,
    Mass.: National Bureau of Economic Research, September 2003).
    ---------------------------------------------------------------------------
        The Inability to Insure Against Certain Risks. Private LTC
    insurance may be unattractive to some consumers because it does not, in
    general, insure against the risk of significant price increases for
    long-term care. Most policies promise to provide contractually
    specified cash benefits in the event that a policyholder becomes
    impaired. To protect themselves against LTC price inflation, consumers
    can purchase a rider to their policy under which the policy's benefits
    grow at a specified rate each year (usually 5 percent); however, such
    riders offer no protection against additional costs if prices rise at a
    faster pace. Concerns about price increases of that kind are not
    unjustified: Medicaid's average reimbursement rates for nursing
    facilities grew at an average annual rate of 6.7 percent from 1979 to
    2001.15 Over a 20-year period, a nursing facility benefit of
    $100 per day in today's dollars would grow to $265 per day with an
    annual inflation protection rider of 5 percent. But the benefit would
    need to grow to $366 per day to keep up with a 6.7 percent annual
    growth rate, should costs continue to grow that fast in the future.
    ---------------------------------------------------------------------------
        \15\ Congressional Budget Office, Financing Long-Term Care for the
    Elderly (April 2004), p. 19.
    ---------------------------------------------------------------------------
        An additional risk is that a policy could become obsolete at some
    point in the future. LTC services, and the private insurance policies
    that cover such care, are steadily evolving as the LTC insurance market
    matures. That fluidity may give some consumers pause, and indeed, one
    prominent rating agency recommended in 2000 that people purchase LTC
    coverage no earlier than age 60 to avoid the problem of obsolescent
    coverage.16 Some consumers might also be reluctant to
    purchase LTC insurance if they believed that changes in public policy
    at some point could render their coverage obsolete.
    ---------------------------------------------------------------------------
        \16\ See Weiss Ratings, Inc., Long-Term Care Policies Vary
    Drastically in Cost to Consumers (Palm Beach Gardens, Fla.: Weiss
    Ratings, Inc., April 5, 2000). Weiss Ratings evaluates the financial
    condition of insurers (including companies that sell life, health,
    property and casualty, and LTC insurance) as well as banks and savings
    and loan institutions.
    ---------------------------------------------------------------------------
        The Availability of Medicaid. The availability of Medicaid poses a
    substantial disincentive for people considering the purchase of private
    long-term care insurance. Although Medicaid in general serves people
    with very low income and assets, it also provides assistance to people
    with impairments who exhaust all of their private sources of financing
    for their long-term care. Even people who have set aside significant
    savings may eventually become eligible for Medicaid assistance. In that
    way, Medicaid serves as an alternative form of insurance for people who
    do not have private coverage and who are impaired for a significant
    period. Indeed, Medicaid's impoverishment requirement may discourage
    people from saving because the less they have, the more quickly they
    will qualify for coverage. It also creates an incentive for people to
    give away or hide their assets so that they can qualify for Medicaid.
        There are substantial drawbacks to Medicaid coverage for long-term
    care. As a means-tested program, Medicaid requires eligible applicants
    to rely on out-of-pocket spending until they use up all of their
    savings. In addition, because Medicaid generally pays lower fees for
    services than those paid by private payers, beneficiaries may not
    receive the same quality of care that private policyholders receive. In
    some states, moreover, Medicaid might not be as flexible in the types
    of services it covers as private insurance would be; a person who has
    private coverage would probably have a broader choice of providers and
    types of care than a Medicaid beneficiary would have.
        Those drawbacks to Medicaid's coverage are balanced by features
    that some people might consider advantageous. Medicaid is free from the
    perspective of the beneficiary. In addition, Medicaid has a defined-
    benefit structure--that is, it covers a specified set of services.
    Private insurance, by contrast, only ensures that a policyholder will
    have a specified monetary benefit to pay for care. It does not
    guarantee that the money will be sufficient to pay for desired
    services.
        Although Medicaid's coverage differs in some respects from that of
    private insurance, it may nevertheless reduce the demand for private
    policies. Indeed, one recent study found that the availability of
    Medicaid constitutes a substantial deterrent to the purchase of private
    insurance, even for people at relatively high income
    levels.17 Medicaid's rules for financial eligibility affect
    people's decisions to purchase private LTC insurance as well as how
    much insurance they buy because the rules offer a low-cost alternative
    (by allowing people to qualify for the program's benefits) to making
    personal financial preparations for possible future impairment. People
    who buy private insurance or accumulate savings substantially reduce
    the probability that they will ever qualify for Medicaid's benefits,
    thereby forgoing the value of the government-provided benefits that
    they might otherwise have obtained. Thus, the availability of Medicaid
    raises the perceived cost of purchasing private insurance or of saving.
    That increase is small for relatively wealthy people who have little
    likelihood of ever qualifying for Medicaid coverage, but it can be
    substantial for others.
    ---------------------------------------------------------------------------
        \17\ Brown and Finkelstein, The Interaction of Public and Private
    Insurance.
    ---------------------------------------------------------------------------
                                   CONCLUSION

        Currently, elderly people finance LTC services from various
    sources, including both private resources and government programs.
    Incentives inherent in the current financing structure have led to
    increased reliance on and spending by government programs and may have
    discouraged people from relying on private resources (savings, private
    LTC insurance, and donated care) to prepare for potential future
    impairment. The demographic changes projected for the coming decades
    will bring increased demand for long-term care and heightened budgetary
    strains.

        [GRAPHIC] [TIFF OMITTED] T0749.001

        [GRAPHIC] [TIFF OMITTED] T0749.002

        [GRAPHIC] [TIFF OMITTED] T0749.003

        [GRAPHIC] [TIFF OMITTED] T0749.004

        Mr. Deal. I thank you, gentlemen. The Chair will recognize
    himself to begin the questioning.
        We, of course, hear a lot of political rhetoric in the
    environment of the President's proposed budget and the
    Congressional Budget Resolution with regard to so-called cuts
    in Medicaid. Dr. McClellan, would you address that issue? Is it
    really cuts, or is it simply reducing the rate of growth?
        Mr. McClellan. First of all, it is simply reducing the rate
    of growth. The projected rate of growth in Federal Medicaid
    spending over the next 10 years is about 7.4 percent per year,
    and the administration's proposals for savings would take that
    all the way down to 7.2 percent per year. So it is really only
    a very small part of overall Medicaid spending, and what the
    proposals are about is getting more for the dollars that we do
    spend.
        For example, our proposal for reducing the overpayments in
    our regulated prices for prescription drugs in Medicaid saves
    money for the States, and enables States that are facing a
    fixed and tight budget to put more dollars into things that
    really do make a difference in people's lives. Instead of
    overpayments for the drugs, there would be more care in
    Medicaid, more support for education programs, making the
    dollars go further.
        Mr. Deal. One of the things that I have heard repeatedly as
    I have talked with various Governors around the country is that
    they are almost unanimous in their urging us to do something by
    way of reform. Governor of Virginia, Governor Warner, puts it
    in terms of we are experiencing a meltdown. In talking with
    Governor Haley Barbour of Mississippi a couple of weeks ago, he
    says that he appreciates the largesse of the Federal
    Government. I think his State maybe has the highest rate of
    participation in terms of Federal dollars versus State dollars,
    but he said even with that, he can't afford the program, and
    that he is bankrupt, in terms of Medicaid expenditures, and is
    going to have to cut somewhere I think in the neighborhood of
    $500 million a year.
        So it would seem to me that this is a problem that is
    fairly common at the State level, in terms of what they are
    experiencing. Is this, Dr. McClellan, is this the kind of
    response you are having as well?
        Mr. McClellan. Yes, it is, Mr. Chairman. My experience, in
    talking with Governors, is that the States just don't have any
    more money to spend on this program, and when they say it is
    unsustainable, and they uniformly do, what they mean is not
    that Medicaid reforms won't take place. They are taking place
    in the States now. But if we don't give them better tools to
    use to get more for the money in Medicaid, the kinds of reforms
    you are going to see are reductions in benefits and cuts in
    payment rates to providers. So even if you have a benefit on
    the book, people don't actually have access to quality care,
    and cutbacks in so-called optional programs, like the home and
    community-based waivers that I think are such an important part
    of making Medicaid work better for the future, are likely to be
    made.
        So we need to move away from that system. That system is
    not sustainable, and the question is whether we are going to
    implement reforms that help the States get more for their
    money, and serve people with quality care better, or whether,
    the track we are on now, of reducing benefits, or cutting
    services, or cutting access to care, is going to continue.
        Mr. Deal. Well, we have heard comments in the opening
    statements from members such as Mr. Shadegg, who outlined what
    has gone on with Arizona. Apparently, they have had a long-term
    waiver that has been in place for a very long time. I know
    that, and Mr. Bilirakis alluded to a request that Governor Bush
    from Florida is making for a rather substantial waiver.
        Do you have any idea how many waivers have actually been
    requested over the last several years, and how many are in
    place?
        Mr. McClellan. I don't have a specific number, Mr.
    Chairman. We will get that for you. But there have been waivers
    from virtually every State. Again, the statutory Medicaid
    benefits were designed in the 1960's, and that is just not the
    way that either acute health care or long-term care ought to be
    delivered today. And the States know that, and that is why they
    come in with these proposals that try to get more for the
    dollars that they are spending than what the Medicaid statute
    tells them they need to do, and that is true for the home and
    community-based waiver in Arizona. Florida has taken similar
    steps to try to give more control to people with a disability,
    and the parents of kids with a disability concerning how they
    get their long-term services. But this is not the way the
    program is designed, and we need to take steps to make it more
    automatic when we have clear evidence that there are better
    ways to spend the money. That ought to be where Medicaid
    starts. You shouldn't have to go through a lot of hoops to get
    there.
        Mr. Deal. And would you agree that if we are at a point in
    time where we can look at the program as a whole, we ought to
    go ahead and make those changes that give that flexibility. For
    example, one of the complaints I have heard is, from Governors,
    is that if you cross the threshold of financial eligibility,
    you then are entitled to the full range of Medicaid services.
    They would like the opportunity to tailor those services in a
    better fashion, but absent a waiver or some consent from the
    Federal Government, they are not able to do that.
        Would you agree, then, that rather than continuing this
    rather hopscotch quilt type approach of waivers, that we really
    ought to look at the program as a whole, and make the kind of
    changes that would not only encompass the changes that the
    Governors want, to give them the opportunity to serve their
    citizens, but would perhaps also make this program more
    workable at the Federal level. Would you agree that is what we
    ought to do?
        Mr. McClellan. We absolutely need to be looking at those
    steps right now. When it comes to benefit packages for some of
    these so-called optional populations, we have a lot of
    experience from the SCHIP program, where there is more ability
    for States to get people in the mainstream coverage, and modify
    the packages, and they work. The States have expanded coverage
    in SCHIP, and again, getting back to the long-term care focus
    of this hearing, consider the home- and community-based
    services waivers or Money Follows the Person initiative, or our
    Independence Plus initiatives; the evidence is very clear that
    we can get better results, meaning higher beneficiary
    satisfaction, more people in the community, more people served,
    better results for the dollars that we spend. That needs to be
    put more centrally into the Medicaid program.
        Mr. Deal. Thank you. The Chair recognizes Mr. Brown.
        Mr. Brown. I thank you, Mr. Chairman. Dr. McClellan, give
    me a yes or no answer to this, because I have a couple other
    questions I want--you talked about the overpayment for drugs
    and the Medicaid, as you were talking about Medicaid costs. Do
    you go along with outgoing Secretary of HHS Thompson on his
    recommendation to repeal the prohibition in Medicare, for a
    moment, the prohibition on Medicare of negotiating drug prices?
        Mr. McClellan. No, when Secretary Thompson was involved in
    all of those discussions, and people looked at what the
    independent CMS actuaries, and what the CBO analysts had to
    say, we went for the approach that was going to get the best
    costs for up to date access to medications, and that is what we
    are implementing right now.
        The recent letter from my actuary, which we can get you a
    copy of, reiterated that that kind of negotiating authority
    would not do anything to get significant savings beyond what we
    are already getting in lowering drug costs----
        Mr. Brown. Except for what has happened in Canada, what has
    happened with Cipro, what--I don't want to debate that.
        I hear you talk about--that--this Medicaid is not a cut. It
    is only--it is not a decrease, it is only a cut in the rate of
    growth. And I have heard that from people who want to cut
    Medicaid and other government programs that have worked for
    Americans for the last 10 years. Discounting, of course, that
    is serving a growing population, and discounting that Medicaid
    increase per capita is smaller than Medicare, it is smaller
    than private insurance. In fact, the Medicaid per capita
    increase is only about half of private insurance increase. But
    I just wanted to set the record straight there.
        Dr. Holtz-Eakin, I would like to ask--you had said in your
    written testimony Medicaid is free from the perspective of the
    beneficiary. I want to make sure I understand what you mean by
    that. Under Federal Medicaid statute and regulations, a
    beneficiary who resides in a nursing home or other institution
    is required to apply most of her income toward the cost of
    care. The purpose of this requirement is to reduce the cost of
    the individual's care to Federal and State governments,
    obviously.
        Take an elderly woman who lives in a nursing home, combined
    income from her Social Security, and say, her husband has a
    defined pension benefit of $1,500 a month. All of--under
    current rules, all of the $1,500 but a sort of a set aside
    personal needs allowance must be applied to the cost of her
    nursing home care. The personal needs allowance is for
    expenses, as we know, not covered by Medicaid, such as laundry,
    hair care. It must, at a minimum, be $30 a month. States have
    the flexibility to make it higher. So if a Medicaid
    beneficiary, say, lives in a nursing home, with her $1,500
    Social Security and pension payment monthly, with a personal
    needs allowance of $50, she is paying $1,450 toward her care in
    that nursing home. If she had a spouse living in the community,
    an additional amount would be protected for the spouse, so that
    he won't be impoverished. The amount protected depends, in
    part, on the amount of income the community--the spouse in the
    community has otherwise.
        My question is, after looking at all of that, given the
    requirement that much of a Medicaid beneficiary's income, in
    this case, of this lady, $1,450 a month, be applied to the cost
    of the care, cost of care, why would a, you know, a fair-minded
    government official say that--I understand people saying that
    for political reasons, that Medicaid is a giveaway, it is
    welfare, it is a bunch of people that are poor, whatever. But I
    don't understand why a government official with the stature and
    reputation of you would say that Medicaid is free from the
    perspective of the beneficiary.
        Mr. Holtz-Eakin. The point of the observation in the paper
    was simply to, in thinking about alternative insurance policies
    in the public sector and the private sector, make the point
    that there was no explicit linkage between a premium payment at
    the front end, and then, insurance benefit coming out at the
    back end. Those aren't explicitly linked to Medicaid. The
    eligibility rules clearly are what they are, and you are very
    conversant with them, but really, it was about premiums versus
    payouts in an insurance----
        Mr. Brown. I appreciate that answer. I--that sounds like
    economist talk, but not--but it also lends itself, it lends
    itself to demagoguery on the part of people that just
    ideologically don't much like Medicaid, that this is a free
    program, when in fact, it is not free to beneficiaries.
        Give us, if you would, following up on that, can you
    estimate the amount of out of pocket resources individuals on
    Medicaid contribute to the cost of their care? Do you have some
    numbers you could give us on that?
        Mr. Holtz-Eakin. We have some rough guesses, on out-of-
    pocket spending in general for those on Medicaid only. Out-of-
    pocket as a fraction of total services is about 21 percent, and
    if you include the value of donated care as out-of-pocket, it
    is about 57 percent. So it depends on which metric you use,
    just those in the market, or those that include the donated
    care.
        Mr. Brown. That being said, can we count on you to never
    again say that Medicaid is free to beneficiaries?
        Mr. Holtz-Eakin. I don't think I am that reliable, but I
    take your point and will be careful about how we describe it.
        Mr. Brown. So you can't quite make that promise, though.
        Mr. Holtz-Eakin. The number of times I have guaranteed
    something for the rest of life and been able to----
        Mr. Brown. Well, I mean, you probably----
        Mr. Holtz-Eakin. I take your point, I am just----
        Mr. Brown. Okay, well, I understand. I mean, you seem like
    a person that tells the truth, so understanding the truth is
    that is Medicaid is not free to the beneficiary, you get the
    point. Okay. Thank you, Mr. Chairman.
        Mr. Deal. The Chair recognizes Mr. Barton.
        Chairman Barton. Well, thank you. And I would love to pass
    a no demagoguery clause for debate, members of this committee.
    If I could get unanimous consent on the minority side, I think
    I can make that stick on the majority side. But somehow, we
    would have to set the fine high enough, the penalty high
    enough, so that we could actually enforce it. So it is a
    serious debate, and obviously, this is a big, big issue. It is
    an intergenerational issue.
        My first question to you, Dr. McClellan. Given what has
    happened in the Senate, with Senator Smith's amendment on the
    Commission, and what happened on the House floor last night
    with the Motion to Instruct, what is your position or the
    President's position about continuing to go forward to really
    try to find some Medicaid reforms this year. If you were me and
    chairman of this committee that has got jurisdiction, would you
    recommend that we continue to seek for solutions, or would you
    recommend that I say to heck with it, and let us look at
    telecom?
        Mr. McClellan. Mr. Chairman, we really hope you will keep
    after it, with all due respect to telecom.
        We stand by our budget proposals. As I have said before,
    there are ways to spend the dollars a lot better in Medicaid.
    Some of that can lead to savings for us and for the States, and
    some of it can lead to better quality care for more
    beneficiaries who really need help from Medicaid today. This is
    an urgent problem. We have a tremendous amount of evidence
    about good ways to go forward that achieve this goal of making
    Medicaid more up to date and more sustainable, and helping it
    serve more people who really need it more effectively, and I
    sure hope you will keep at it.
        Chairman Barton. Well, I am committed to the process, and I
    know Chairman Deal is. Ultimately, we have to make sure that we
    have the votes, and that what we want to do makes sense, from
    the perspective of the population we are trying to help, which
    is our Medicaid-eligible population.
        On a policy question, if we do reform this year, should
    harmonization between Medicare and Medicaid be a part of that?
    Because some of these services can be covered either way. You
    know, Medicare has its own set of issues, separately, but if we
    are going to start this process, should we look at the best way
    to provide the benefit, whether it should be a Medicaid benefit
    or a Medicare benefit?
        Mr. McClellan. I think that can be part of the whole
    discussion, and I can tell you that there is a lot of interest
    in doing that from the States. I just got back from a meeting
    that we held that was sponsored by the National Governors
    Association yesterday, and is going on today in Chicago, where
    we talked about how we can implement the new Medicare law
    effectively. And while a lot of the attention has appropriately
    been focused on the drug benefit, one of the things that people
    haven't paid as much attention to, but should, is the fact that
    the law is really about providing more coordinated care, more
    continuity of care, and more prevention of complications for
    Medicare beneficiaries. And there are few Medicare
    beneficiaries who have more to gain from the new benefit than
    our dual eligibles, who are often getting very fragmented care.
    Currently, part of it is dealt with in one part of a State
    agency, another part is dealt with somewhere else. Some of it
    is dealt with in Medicare, and it is not put together very
    well. We are trying really hard to make available health plans
    and other support that do a better job of coordinating care. I
    mean, working with the States, bringing up the topics in this
    committee can be a big help in that process.
        Chairman Barton. I want to ask our Director of the CBO, as
    we do this, is your agency committed, and I am serious about
    this, I am not interested in going through this process, and
    getting CBO scores that bear no reality to what the project is
    that we are looking at--can you convince or commit to this
    committee, and I don't know how to define fair, but you and I
    have had discussions on other programs, where we are
    diametrically opposed to what the score was, can we set the
    ground rules so that if we are looking at a particular program,
    what it costs, and what it is projected to cost, that we can at
    least agree to how to do the scoring?
        Mr. Holtz-Eakin. We can set the ground rules in the way
    that I hope that they have always been set, which is we will
    examine the legislative proposals in their completeness. We
    will look at all the impacts that they may have on the economy,
    and thus feed back to the budget, and show the impact for
    spending, or revenues, in the case of the Joint Committee, and
    in places where you have better information than we have, we
    welcome it. In places where you have questions about it, or
    disagree with the analysis, and have insights that you want to
    share, I welcome that as well.
        Chairman Barton. Is it possible to have a system where your
    staff and the committee staff, on a bipartisan basis, meet to
    say here is the program, here is what we are looking at, at
    least to agree, without committing to how you are--what the
    specific score is going to be. I am not interested in that. I
    just want a protocol that we both agree that that does cost, or
    that would save, so that we, you know, we do--we have done
    things in the Energy Bill where we were trying to limit
    spending, and they were scored by CBO as increasing spending.
    And I am not interested in that kind of a process. I want an
    interactive dialog with the staffs, and in some cases, maybe
    principals, members, again, on a bipartisan basis, so that we
    at least understand what the system is, without being--not
    trying to commit you to a specific dollar score, just how do we
    do it, the formula, so to speak?
        Mr. Holtz-Eakin. I can commit to what I believe is business
    as usual, and that would involve all of the elements you
    mentioned, although I can't guarantee agreement on all the
    details at the end. I am happy to meet with you, the staff is
    happy to meet on a bipartisan basis, with staff of the
    committee on a regular basis. We stand ready to explain and
    accept the information. I believe that is business as usual.
        Chairman Barton. Yes, I have got one more question to Dr.
    McClellan. Home care, home-based care or community-based care,
    lots of problems, lots of restrictions. That should be a part
    of any reform package that we make it possible for
    individuals--in your testimony, you are very strong on that,
    that they give them the choice to--they are not prevented from
    home-based care or community-based care, and set up the ground
    rules on how to pay for that.
        Mr. McClellan. That is right. We are past the stage where
    we should be gathering evidence and talking about these kinds
    of reforms. If you look in my testimony, look at the testimony
    of some of the other witnesses here today, and go to
    www.hcbs.org, where we have worked with other groups to compile
    a lot of this evidence, what you see is that these programs
    that increase personal control, that give people support to get
    care how they prefer it, that address issues like one time
    transition costs, you will see that they save money. They are
    based on the fact that the most cost-effective place to provide
    care for many people on Medicaid is where they would prefer to
    receive it. There is no place like home.
        Chairman Barton. Thank you. Thank you, Mr. Chairman.
        Mr. Deal. I thank the chairman. Ms. Capps is recognized for
    questions.
        Ms. Capps. Thank you, Mr. Chairman. Mr. Holtz-Eakin came
    before the Budget Committee earlier this year, that I sit on,
    and I want to go down a series of questions for you about what
    the effect of the proposal in placing additional restrictions
    to asset transfers will mean for eligibility for nursing home
    care.
        In March, CBO re-estimated the President's fiscal year 2006
    budget, and you estimated that the President's proposal to
    tighten the current penalty for asset transfers would reduce
    Federal Medicaid spending by $1.4 billion over the next 5
    years. And since Federal Medicaid long-term care spending is 56
    percent of all Medicaid long-term care spending, the Federal
    part, this implies a total Federal and State savings of over $2
    billion, $2.5, $2.6 billion. These savings represent amounts
    that the Federal and State governments will not be spending on
    nursing home care while the penalty, delay in Medicaid
    coverage, is being applied.
        During the penalty period, the nursing home will presumably
    continue to care for the beneficiary. That is--this is the
    piece that I am trying to get at, in terms of the budgets of
    the nursing homes. Any payment for this care, then, will have
    to come from either the beneficiary, or the beneficiary's
    family, it would seem to me. And my question, first question
    is, what is your estimate, assume, about how many beneficiaries
    will be affected by this tightened penalty? Is there a way to
    sort of look at how this cost will be translated into community
    care?
        Mr. Holtz-Eakin. I don't have the exact number of
    beneficiaries, but the estimate was built off information that
    came, actually, from some of the waiver programs, in
    particular, Connecticut----
        Ms. Capps. Right.
        Mr. Holtz-Eakin. [continuing] which reported that on the
    order of 30 percent of their beneficiaries had undertaken some
    sort of asset transfer, and that struck us as a bit high, since
    Connecticut is not your average State, a little bit higher
    income, so we estimated it was something on the order of 20
    percent of beneficiaries would be in the mix for those affected
    by the change in the penalty period.
        Ms. Capps. Okay. About how much, on average, does your
    estimate assume that would be transferred?
        Mr. Holtz-Eakin. About 1 to 2 months worth of nursing home
    care. The two key pieces in the estimate are 20 percent of the
    people involved, and the impact is 1 to 2 months of additional
    care that would be picked up by the beneficiary or their
    family, in this case, and not on the Medicaid rolls.
        Ms. Capps. Well, so then, how long--you have kind of said
    it, but I want to hear it clearly, how long, on average, would
    this estimate assume that these individuals would be denied
    Medicaid coverage due to their transfer?
        Mr. Holtz-Eakin. This would change their time on Medicaid
    by 1 to 2 months, about 1\1/2\.
        Ms. Capps. Okay. I guess I am concerned about that 1 or 2
    months. And you--the beneficiaries are those--the actual
    beneficiary would be the one responsible for the $2.6 billion
    in the big picture, but in their own case, those 1 to 2 months
    worth of care. Is that----
        Mr. Holtz-Eakin. It is either the beneficiary and the
    family, and the----
        Ms. Capps. Well, some--not all beneficiaries have family. I
    mean, we can assume, but actually, the burden then is on them.
        Mr. Holtz-Eakin. The burden would be on the beneficiary,
    but remember, the notion is that these are assets that they
    have in hand at the time, and that by changing the penalty
    period, we simply are estimating they would draw down their
    assets, instead of being on the Medicaid program.
        Ms. Capps. And if they can't pay, then the burden would go
    to the nursing home, or they would be turned out, or I mean,
    because it is a temporary--how do you see this playing out?
        Mr. Holtz-Eakin. Can I get--if I could get slide numbers--
    --
        Ms. Capps. And then, while you are doing that, I want to
    ask you about how much would this cost? What is 1 or 2 months
    worth of care per individual, average, or for Connecticut, or--
    --
        Mr. Holtz-Eakin. A ballpark average for private-pay nursing
    home care is about $60,000 to $70,000 annually. If Medicaid for
    the nursing home carethe Federal cost would be about $35,000 on
    average per year.
        Ms. Capps. For 1 to 2 months of care?
        Mr. Holtz-Eakin. Per year, and then--so you would be
    looking at $5,000 to $6,000 for private-pay, or $3,000 for the
    Federal share of Medicaid costs.
        Ms. Capps. Okay.
        Mr. Holtz-Eakin. [continuing] for 1 month.
        Ms. Capps. Okay.
        Mr. Holtz-Eakin. If we look at slide 9, I don't know if
    that is possible.
        Ms. Capps. I am not in the best place.
        Mr. Holtz-Eakin. And I won't take--if I----
        Ms. Capps. Just tell me what it says.
        Mr. Holtz-Eakin. Well, it shows you diagrammatically the
    strategy typically used in sheltering the assets.
        Ms. Capps. Okay.
        Mr. Holtz-Eakin. And the point is that there are assets
    there.
        Ms. Capps. But if they have transferred the assets, do they
    have them?
        Mr. Holtz-Eakin. By changing the penalty period, you change
    the incentives to transfer the assets, and they presumably
    would not have done so. At the moment, if they have got the
    assets, in a strategy known as half-a-loaf, they can give away
    half, voluntarily incur the penalty, and so with certainty,
    they have got the assets, and they are just incurring the
    penalty, and then going on to Medicaid more quickly than they
    would if you changed the penalty period.
        Ms. Capps. So if they are not transferring a lot of money,
    what are their assets?
        Mr. Holtz-Eakin. We don't have a particular estimate of the
    total assets involved, but we--if that is something you would
    like to go to, we would be happy to work with you. This is an
    area in which--firm estimates of asset transfers for Medicaid
    purpose are very difficult to pin down. I mean, we have seen
    estimates for total transfers from this group that are as high
    as $40 billion. What a fraction of that might be induced by
    Medicaid incentives is hard to say. We have seen an estimate of
    $2 billion for the transfers from Medicaid incentives alone. It
    is an area of great imprecision, and one that is worth more
    study.
        Ms. Capps. So you are saying it is worth more study. I
    mean, if we go from this hearing to legislation, there is a lot
    more information that we need as to the way this is going to
    affect individual lives.
        Mr. Holtz-Eakin. Well, we would certainly be happy to
    document the information we have, and to the extent that more
    information is available, we would be eager to see it.
        Mr. Deal. The gentlelady's time has----
        Ms. Capps. Thank you.
        Mr. Deal. [continuing] expired. Dr. Norwood is recognized
    for questions.
        Mr. Norwood. Thank you, Mr. Chairman. Dr. McClellan, it
    really is good to see you again, and we are glad you are here.
    I want to mention this to you for fear I might forget it.
        I sent you a letter last week on dental health aid
    therapists, whatever that is. But I really--it is very
    interesting to me, and very important to me, and I really would
    appreciate you instructing staff to get me an answer to that as
    soon as you can.
        Mr. McClellan. You will get it promptly. Thank you.
        Mr. Norwood. Thank you, sir. My questions are sort of
    basic. I am trying to understand how in the world would you
    reform Medicaid. Some people think the answer is oh, gosh,
    don't spend less money. That isn't a reform, necessarily, but
    see if you can answer some basic questions.
        How many patients in the country are on Medicaid that are
    receiving benefits for long-term care? Do we know that for
    2004?
        Mr. McClellan. We do. I am not sure I have the total number
    right now. There are about, at any given time, there are about
    1.6 million beneficiaries in nursing homes.
        [The following was received for the record:]

        We do not have the 2004 data available. The most recent numbers we
    have right now are for 2002. In 2002, there were about 1.6 million
    beneficiaries who received care in institutional settings, and about
    3.8 million individuals receiving home- and community-based long-term
    care services.

        Mr. Norwood. All right. Nursing homes, but it is different
    for those accumulated in long-term care.
        Mr. McClellan. That is right, but most people in nursing
    homes are on Medicaid. With the increase in the number of home-
    and community-based waivers, we have now, we estimate, over a
    million people getting services through one or another kind of
    these waivers that I have been talking about, at a much lower
    cost per person, I might add. And so, there are several million
    people altogether.
        Mr. Norwood. Let us talk about the 1.6, and we will figure
    out what the larger number is. Do we know how much we are
    spending on the 1.6 million people on nursing home care? Do we
    have an annual figure per person?
        Mr. McClellan. For the 1.6 million, remember, that is the
    total, and about three quarters of the individuals are getting
    financing from Medicaid. In institutions, Medicaid spends, on
    average, over $30,000 a year, probably around $33,000 a year,
    for institutional care, per person.
        Mr. Norwood. So it is about 33. Do we know, if we look at
    all the money the Federal Government spends, pretty good, huh?
        Mr. McClellan. Yes.
        Mr. Norwood. Of all the money the Federal Government spends
    in 2004 on Medicaid, what percent of that money is for long-
    term care? Or--well, I want to say long-term care, rather than
    just nursing home.
        Mr. McClellan. It is about a third that goes to----
        Mr. Norwood. Thirty, I have heard 30 to 40 percent.
        Mr. McClellan. Yes. That is right. That is right.
        Mr. Norwood. That is a large amount, isn't it?
        Mr. McClellan. It is, and it is an amount that is growing.
        Mr. Norwood. Off the subject a wee bit, but this is about
    reform. This is about dollars in Medicaid. Do you know how much
    money we spend in Medicaid on illegal aliens a year?
        Mr. McClellan. I don't think we have a specific estimate of
    that. It is not as large as the spending on long-term care.
    There are----
        Mr. Norwood. I should hope. That is a third.
        Mr. McClellan. Right. There are a lot of steps in place
    that we try to take to make sure that the Medicaid spending is
    going to people who are legally intended to be covered under
    the program. If there is a question----
        Mr. Norwood. Of course, those people are accepted at the
    State level, so it is sort of out of your hands to some degree,
    as to whether they are illegally in the country or not.
        Mr. McClellan. But we do work with the States to make sure
    that they are spending the money appropriately. So, it is the
    States that are on the frontline for making eligibility
    determinations, but we do monitor State practices.
        Mr. Norwood. You do that real well?
        Mr. McClellan. Well, we are always trying to do it better.
        Mr. Norwood. I could get you up a few that aren't doing it
    real well.
        Mr. McClellan. There is no question that the problems that
    many States, especially border States, are facing, with
    undocumented immigrants, are putting some strains on----
        Mr. Norwood. Well, it is not just border States.
        Mr. McClellan. [continuing] care and hospital care.
        Mr. Norwood. My home State of Georgia is not a border
    State, and there is a problem there. Well, I am--time is
    running out. I got to move quickly. Let me make the point,
    first, that Mr. Chairman, I have a long-term healthcare policy.
    Even I do. It is a great policy. It pays about $5,000 a month.
    I think it costs me somewhere $3,000, $3,600 a year. I can't
    understand why in the world it wouldn't be a better plan to
    have Medicaid patients have long-term care policies, even if we
    paid the policy. I mean, it has got to be cheaper for the
    government, and in my personal opinion, it is highly likely
    that it would be better care.
        Last, I want to--okay. Well, I am going to get CBO in just
    a second, if I have the time. Maybe you could answer the
    question to that, Mr. Holtz-Eakin, but you are probably pretty
    qualified to tell us, this committee, if it is a feasible
    strategy to move a significant number of long-term care
    recipients or potential recipients to private insurance, like I
    am talking about, if we continue to have Medicaid just exactly
    like it exists today. Is it possible to move to long-term care
    private insurance?
        Mr. Holtz-Eakin. The issue is how many people will have the
    wherewithal to buy a private insurance policy, and the desire
    to protect their assets to some extent, and given that, what
    incentives do they have to purchase a private insurance policy,
    versus rely on a government----
        Mr. Norwood. They don't have any other way, or we will pay
    for it. If they can't afford the policy, we will pay for it.
        Mr. Chairman, last, I want to point out for the record that
    earlier, it was mentioned that Medicaid pays for long-term
    care. I think it is pretty important for us to realize Medicaid
    doesn't pay for a thing. The American people pay for Medicaid.
    The taxpayer pays for Medicaid, and they are insisting on some
    reforms in this program, particularly in long-term care. I
    thank you for your indulgence, Mr. Chairman.
        Mr. Deal. Ms. Baldwin is recognized.
        Ms. Baldwin. Thank you, Mr. Chairman. Dr. McClellan, I read
    that you were recently quoted at White House Conference on
    Aging as saying that you planned on eliminating the
    institutional bias in Medicaid by December of this year. And as
    you know, in most instances, it is more difficult to obtain
    Medicaid coverage of needed care in the home, and thus many
    people with disabilities are living in institutions, even
    though they would rather have the freedom of living at home.
        So I applaud your statement and its intent, because I, too,
    support helping individuals with disabilities live in the least
    restrictive setting of their choice. I would really like to
    know more specifics on what sort of policies you plan to adopt
    at CMS in order to accomplish this goal in this very short
    timeframe.
        Mr. McClellan. I think there is a little bit of a
    mistranslation. We didn't say we planned to do it. This is
    something that it is going to take changes in legislation. The
    way that the Medicaid statute is set up, as you know, is that
    under the Medicaid statute, you are entitled to a nursing home
    benefit. That is the entitlement, because that is what long-
    term care meant in the 1960's.
        What we have seen, through the waiver programs that we have
    supported and through the Independence Plus demonstration
    programs, is that we can serve more people in the home or in
    other settings that they prefer. We can do it at a lower cost.
    We can do it with better healthcare outcomes, and we can do it
    with better satisfaction for our beneficiaries when we move
    away from that statute toward the kinds of approaches that
    States have adopted when they jump through all of these hoops,
    and go through all the regulatory hurdles to get one of these
    waivers approved. What we would like to see is that approach
    being built more directly into the Medicaid program, and that
    gets back to the comment from Chairman Barton earlier----
        Ms. Baldwin. Right.
        Mr. McClellan. [continuing] that we need to have a
    discussion with you about how we can do that, about how we can
    serve more people in a setting that they prefer. I am confident
    we can do it in a way that gets assistance to more individuals
    who need help, and at a lower cost per person, and help reduce
    the strains on the Medicaid programs that we have been talking
    about this morning.
        Ms. Baldwin. Would you like us to consider making home and
    community-based care a mandatory service under Medicaid?
        Mr. McClellan. What I would like us to do together is look
    at the experience we have, where we know that when States adopt
    these reforms, these waivers, which they have to go through a
    lot of work to do today, it is not the default today----
        Ms. Baldwin. Right.
        Mr. McClellan. It by no means happens automatically. As you
    said, most people on Medicaid who need long-term care services
    cannot choose how to get them. We need to look at the
    experiences we have, and find a way to build that into the
    program more automatically. That is something that is going to
    take a dialog between you and us, and I was very encouraged, as
    I said earlier, by the opening statements, where there seemed
    to be pretty strong support on both sides of the aisle that we
    could find a way to get to an agreement on making Medicaid more
    rebalanced toward personal control and spending the dollars the
    way that people want them spent in the program.
        Ms. Baldwin. Well, again, in terms of the discussion that
    we will be having in order to meet this goal, do you see
    recommendation of lifting the caps on the current Medicaid home
    and community-based care waivers, or suspending budget
    neutrality policy, so that again, to accomplish that goal, all
    that wish to live in the community are able to access community
    care?
        Mr. McClellan. Well, I think we need to deal with the
    reality, that as you have heard, and as I have heard from all
    the Governors I have talked to, that States don't have more
    money to spend, so we need to find ways to implement these
    programs that make the dollars in Medicaid go further, that
    serve more people at the same or lower costs. And a lot of
    these waivers give us some directions in how to do that. Many
    of the States are prioritizing how the long-term care services
    are used, and who they can, and want to serve first. One
    approach is to consider what the top priorities are for
    spending this money better. Another approach is to bring in
    some of the other ideas that have been discussed this morning,
    on bringing in more private funding for long-term care needs.
        I think one of the reasons that this bias in the Medicaid
    program has persisted for so long is that it acts as a kind of
    rationing. There are a lot of people who don't want to be in an
    institution, and if you don't have a better design in the
    Medicaid program, a fallback is to say that is all we are going
    to cover. And that is a good way to keep costs down. It is not
    the most effective way to spend Medicaid dollars, but it is one
    that we ought to try to. And by bringing in ideas like the
    Long-Term Care Partnership, and seeing what we can do to
    promote and help people understand about the benefits of
    approaches like reverse mortgages, I think we have got a lot
    better chance to help more people in a community where they
    need it while they are dealing with the fiscal realities that
    States are facing today. That is the discussion that we ought
    to be having this year.
        Mr. Deal. Dr. Burgess.
        Mr. Burgess. Thank you, Mr. Chairman. Dr. McClellan, I hope
    that if we were sitting here in this committee today, and were
    trying to devise the Medicaid system, that it wouldn't look
    like what we are talking about. But have you thought about what
    the Medicaid system should look like. If we were to start the
    year 2005, and make the Medicaid system, what would it look
    like? What would it be?
        Mr. McClellan. Well, it is a very good question, Dr.
    Burgess. We have done a lot of thinking about that, in
    preparation for this hearing, and in reviewing all the results
    that we have seen from waivers, one way that it would be
    different, as I have been talking about, is that it would focus
    on the needs of individuals that it is intended to serve.
    Medicaid needs to first and foremost focus on people who are
    truly medically needy. That is where the taxpayers want us to
    spend the dollars. That is why the Medicaid program is such an
    essential lifeline. It would give them, when it comes to long-
    term care services, much more control over how they get their
    services, and the support they need to use those Medicaid
    dollars effectively.
        And the reason I can say that with a lot of confidence is
    that we have many cases from all of these home- and community-
    based service waivers, and our Independence Plus
    demonstrations, and some of these other approaches to provide
    care in the community, that give these results, that show that
    you can serve people more effectively, meaning they are
    happier, and you can do it at a lower cost per person. You can
    expand the amount, the number of people who are served with
    these approaches, and that ought to be our focus in the
    Medicaid program. Let us look at what is actually working to
    get better care to the people who need it the most, and let us
    build that into the Medicaid program.
        Mr. Burgess. And Dr. Holtz-Eakin, along those same lines,
    have you thought about what the Medicaid system should cost?
        Mr. Holtz-Eakin. We don't have a branding as a target
    estimate. I think the important thing for the committee to keep
    in mind is that while it may be the case that as we get older
    and as a Nation become better off, we will spend more on
    healthcare. It is simultaneously the case that the projections
    under current law of healthcare spending are a key part of a
    long-term budget outlook which threatens to be numerically
    unsustainable, and we have documented this in our 2003 report.
    It is the most pressing domestic policy matter that we see out
    there, and looking at long-term care in conjunction with all
    the other demands in the health area simultaneously is an
    imperative. We are thinking about the budgetary future of the
    United States, but also its economic policies.
        Mr. Burgess. So just for the record, say that again. It is
    the most pressing domestic policy issue that we face?
        Mr. Holtz-Eakin. Yes, it is.
        Mr. Burgess. Okay. Thank you for your candor. Well, again,
    I, too, have a long-term care policy. I bought it in the year
    2000, because my mother told me to, and it was a good idea, and
    I am glad I did. One of the things that, when I looked into it,
    one of the things I wanted to be sure of was that I did have
    the ability for home care or community care, and then the other
    thing that I looked into is if I was--if I did the spend down
    and went on Medicaid, that instead of being in Denton, Texas, I
    would probably be in Paris, Texas, because all of our nursing
    homes in Denton have been closed down because of liability
    problems, or they are just empty shells of what they used to
    be. So it is hard enough to get your kids to come visit you
    anyway, but if you move 400 or 500 miles away, that was going
    to be another problem. So it was a pretty easy decision for me
    to buy my own policy, and just like Dr. Norwood, I have a
    policy that covers myself and my wife, and it is $2,000 a year,
    and it is not a tremendous financial burden. Sure, there is
    other things I could do with that money, but it seems like we
    have anesthetized the American public about the need for long-
    term care insurance, or even to consider long-term care
    insurance, to even weigh it in the equation of your household
    basket of expenses. Most people, and in fact, before my mother
    told me to do it, I would have never considered long-term care
    insurance.
        What are some of the things that we can do as we go through
    this process to un-anesthetize the American public about the
    necessity of the purchase of long-term care insurance, or at
    least to look into the possibility of purchasing long-term care
    insurance. And I guess we will start with you, Dr. McClellan,
    but I do want to hear, Dr. Holtz-Eakin, your comments as well.
        Mr. McClellan. Well, that is a very good question. We have
    undertaken some steps in recent months to provide more
    education and support tools for people. You can see them when
    you visit our website. We have also been working in partnership
    with the administration on Aging to develop resources that
    people who are thinking about long-term care planning can use,
    and we helped fund a study that you are going to hear about a
    little bit later in this hearing, conducted by the NCOA, which
    has looked at the potential for reverse mortgages, and what
    people's opinions are about them right now. And I think despite
    all of that work, there clearly is a knowledge gap, and many
    people aren't thinking ahead.
        As you heard from Congresswoman Wilson, a lot of people
    think that Medicare is somehow going to take care of this, and
    that is just not the case. People do need to be planning for
    their long-term care needs if they really want to have the kind
    of support in the setting that they would prefer. So I think
    educational activities are really important, and they ought to
    be part of our efforts this year to try to get to a more
    sustainable long-term care system.
        Mr. Holtz-Eakin. I guess I would offer three observations.
    The first is that to the extent that there is awareness, it
    also may be useful to have policies that are more standardized
    and easier for people to compare, so that they can actually do
    the shopping and know what they are paying for when they get
    it.
        And it would probably be useful, as well, to remember that
    incentives to purchase the long-term care policy are the same
    incentives that basically say I would like to preserve my
    assets somehow, rather than have to pay them out for my long-
    term care. So looking at this simultaneously with the broad
    awareness of transfers of assets as a potential way to
    preserve, or having things in the home, which is not a counted
    asset, as a way to preserve, thinking comprehensively, and not
    just focusing on the long-term care market in isolation I think
    would be a second thing to worry about.
        Mr. Burgess. But Representative Wilson from New Mexico
    already pointed out that the greatest marketing effort right
    now that is going on is with the portion of asset protection
    attorneys who are encouraging people to go the other way, and
    protect assets, and then rely on the Medicaid system for long-
    term care insurance. I don't know if we can get any of these
    quotes up that I was given. Slide 4, I don't know if that will
    project for us, it was just rather enlightening, as I was
    glancing through these. If not, I will ask unanimous consent
    that we put that in the record.
        ``So if you want to confuse, completely confuse the
    Medicaid authorities, they may just approve you on the basis
    that they haven't got a clue of what is going on, and it looks
    so fancy it must be right. Just don't mention my name when you
    do it. This is Alex Bove, Advanced Medicaid Planning and
    Related Issues, National Academy of Elder Law.''
        So that is kind of what we are up against on the other
    side, and it seems to be very difficult to get that message
    out. Well, I just want to ask Dr. Holtz-Eakin one other thing.
    Along the lines of Chairman Barton, when he talked about
    honesty or ground rules for CBO scoring, one of the examples
    that came to mind, Dr. Zerhouni, I don't remember whether it
    was in this committee or in a private briefing, talked about a
    strategy for Alzheimer's. If they can get to the point where
    they can delay the onset of Alzheimer's disease by 5 years, the
    cost of taking care of an Alzheimer's patient could be reduced
    by 50 percent. Do you have any way of working that type of
    knowledge into your scoring as you go through and look at the
    cost of taking care of an Alzheimer's patient, for example?
        Mr. Holtz-Eakin. Certainly, that is how we build our
    estimates. We look to the research literature, and
    particularly, the peer reviewed research literature to give us
    consensus estimates of, in this case, medical impacts, other
    areas that would be different impacts, look at the cost
    implications that would come from changes in those medical
    treatments that are necessary. And then, build that into
    estimates of legislation to the extent that the legislation
    would actually deliver them, and often, there are tough calls
    about how it would be implemented, and the kinds of
    administrative procedures that would put the legislation into
    place. That would be Mr. McClellan's domain. Then there are
    also some things that people often forget, which is to the
    extent that these are ongoing medical improvements that would
    happen anyway, they are usually in our baseline, and as a
    result, people don't get credit twice for having them in the
    baseline, and then proposing legislation.
        And particularly in these areas, the time horizons often
    work against proposals. Spending is usually up front, medical
    improvements are often well down the line, outside five or even
    10 year budget windows, and as a result, there is a mismatch.
    But the process----
        Mr. Burgess. So the short answer is no.
        Mr. Deal. The gentleman's time has expired.
        Mr. Holtz-Eakin. But the information goes into it, and I
    want to emphasize that that is standard business.
        Mr. Burgess. All right. Thank you.
        Mr. Deal. We have got a vote going on that is going to be
    for several votes, probably four or more. Mr. Allen, would you
    like to proceed with your questions?
        Mr. Allen. I would, Mr. Chairman.
        Mr. Waxman. Are you going to bring them all back, so we
    can----
        Mr. Deal. Well, I was hoping we could finish with this
    panel and dismiss them, but we still have a couple of others
    that have questions. You both have questions?
        Mr. Allen. Mr. Chairman.
        Mr. Deal. I guess we are going to--we will have to bring
    them back. Would you like to go ahead and start?
        Mr. Allen. I would. Well, Mr. Waxman, will you be able to
    come back or not?
        Mr. Waxman. Well, my problem is that I have to be at
    another committee, and I think that the chairman probably wants
    to dismiss this panel, and you and I are the only ones left for
    a 5-minute period, so let us----
        Mr. Deal. I think we are going to have to have them back--
    --
        Mr. Waxman. [continuing] be brief.
        Mr. Deal. [continuing] unfortunately Mr. Waxman. What is
    that?
        Mr. Deal. We are going to have to----
        Mr. Allen. Well, I would defer first to Mr. Waxman, and
    then do my questions after his, if that is----
        Mr. Deal. Well, we recognize Mr. Waxman then.
        Mr. Waxman. Thank you very much. Unfortunate timing. Dr.
    McClellan, you said you wanted to eliminate the institutional
    bias in the Medicaid program, and you have a New Freedoms
    Initiative, which is intended to move individuals with
    disabilities from institutions to the community. Is this
    proposal a demonstration or a broad program for which all
    individuals with disability would be eligible?
        Mr. McClellan. This is a program that would provide funding
    at the level of $1.75 billion over 5 years, with $350 million
    available for each year. It would be enough funding for a
    number of States to do it. As always, when you have new
    reforms, if you can give them a boost at the beginning, it is
    more likely that you will be able to get other States to come
    along later. We have seen the----
        Mr. Waxman. Well, is this going to cost, as I understand
    it, $2.9 billion over the next 10 years?
        Mr. McClellan. We are authorizing $350 million a year for
    the next 5 years, and I think the projections that the
    actuaries have done suggest that some of that spending may
    occur a little bit later, but if it occurs sooner, we are fully
    supportive of that, too. We would authorize----
        Mr. Waxman. Now, this is also going to be in the context of
    a proposal to cut $60 billion from Medicaid. According to your
    budget, you propose to cut $6 billion out of Medicaid by block
    granting administrative costs. Is that right?
        Mr. McClellan. We propose reforms in administrative costs,
    which as you know, have been one of the most rapidly growing
    components of the Medicaid program.
        Mr. Waxman. But this--you are going to get $6 billion out
    of that.
        Mr. McClellan. I think it could be. There are other
    versions of administrative cost reform proposals. CBO has
    scored some that would limit the administrative costs increases
    to 5 percent per person over----
        Mr. Waxman. But isn't it true that part of Medicaid
    administrative cost goes to survey and certification of nursing
    homes in which individuals with disabilities reside?
        Mr. McClellan. Some of it goes to survey and certification.
    There also, as you know, is Federal funding that we provide for
    some of the nursing home survey and certification activities.
        Mr. Waxman. In your budget, you propose to cut more than
    $11.7 billion from targeted case management. Is that correct?
        Mr. McClellan. The fiscal year 2006 budget reduces spending
    on targeted case management by $8.2 billion over 10 years.
        Mr. Waxman. And isn't it true that individuals with
    physical impairments and limitations, like blindness and spinal
    cord injury, severe mental or emotional conditions, including
    mental illness, and other disabling conditions, such as
    cerebral palsy, cystic fibrosis, Down's syndrome, and mental
    retardation, muscular dystrophy, autism, spina bifida, HIV/
    AIDS, rely on targeted case management for their care?
        Mr. McClellan. There are other programs that provide care
    coordination and support. For example, in our Money Follows the
    Person demonstration----
        Mr. Waxman. Well, there may be other programs, but doesn't
    a lot of that money that is targeted case management go for
    those people?
        Mr. McClellan. It also goes for services provided in
    prisons, in schools, in areas that are outside of the primary
    responsibility of the Medicaid program, where there are other
    Federal financing sources that are clearly more appropriate.
        Mr. Waxman. I want to point out my colleague, Dr. Burgess,
    I just went through people with a lot of disabilities. Those
    people can't get long-term care insurance. If people have MS,
    even it is not active, they can't get--long-term care insurance
    provides underwriting to exclude people from being able to buy
    it. I just think we have to keep that----
        Mr. Burgess. Will the gentleman yield?
        Mr. Waxman. I won't, because of the time pressure. But I
    just want to point that out. It is a problem when we look to
    private insurance, but by my calculation, Dr. McClellan, while
    you propose increasing spending for individuals with
    disabilities through a few demonstration projects to the tune
    of $1.4 billion over 5 years, you then actually cut $17.7
    billion out of areas in Medicaid that they have--that will have
    a particularly negative impact on individuals with
    disabilities.
        I find it hard to believe we can make improvement in the
    lives of individuals while cutting such a significant amount of
    funding for the program that serves so many people with
    disabilities. Does the administration favor requiring a person
    to take out a reverse mortgage on their home before they can
    receive long-term care under Medicaid?
        Mr. McClellan. We do not propose any such requirements.
    What we have proposed is making sure people know about the
    options that reverse mortgages can provide, since there is a
    lot of potential for helping people get care where they want it
    and how they want it through mortgages.
        Mr. Waxman. So, you wouldn't mandate it. Does the
    administration favor a requirement that a person have a long-
    term care insurance policy as a condition for eligibility to
    receive long-term care benefits from Medicaid?
        Mr. McClellan. We haven't proposed a requirement. We have
    proposed the Long-term Care Partnership program be reinstated
    by Congress, because that allows people to use a long-term care
    insurance policy to protect their assets, and also keeps
    Medicaid funding reserved for people who truly can't afford to
    pay.
        Mr. Waxman. As a man familiar with Medicare, Medicaid,
    economics, and human nature, do you think people refuse to go
    out and buy private insurance because they are calculating on
    the fact that Medicaid is going to be available to them when
    they have long-term care insurance, or do you think it is more
    likely that they don't anticipate ever having those needs, they
    think Medicare maybe already covers it, they have other
    pressing economic demands on them, and they are not well-
    informed about these policies, and these policies exclude
    people who have underwriting problems, and there are no uniform
    standards in terms of inflation and coverage and all of that?
    Do you think that Medicaid is a reason why people aren't buying
    these policies?
        Mr. McClellan. I think that there are a number of reasons
    like the ones that you have described, but all that leads to
    the conclusion that we need to change the current system. Right
    now, three quarters of the----
        Mr. Waxman. Change the current system of Medicaid?
        Mr. McClellan. Change the current system in Medicaid,
    change the current system in providing support and education
    for people to use these alternatives to Medicaid to finance the
    long-term care that they want in the way that they want it. As
    you said, a lot of people don't know about it. If we did a
    better job of informing people and making these options
    available, and showing how they can help, then that can reduce
    the pressure on the Medicaid program. When three quarters of
    the people in nursing homes are getting----
        Mr. Waxman. I don't disagree with you, but----
        Mr. Deal. Gentleman, your time has expired. We can----
        Mr. Waxman. My time has expired. Well, he didn't----
        Mr. Deal. [continuing] speculate on what people's motives
    are----
        Mr. Waxman. [continuing] answer my question.
        Mr. Deal. Well, you asked him----
        Mr. McClellan. Well, I tried, but----
        Mr. Deal. [continuing] to speculate on the human mind, and
    their motivations. That would be great speculation as to what
    people's motivations are. We are going to unfortunately have to
    adjourn for another series of votes. Gentlemen, I had hoped
    that we were going to be at the point we could dismiss you, but
    I do have a couple of other members who have already gone to
    vote, and asked if you would stay for their questions when we
    return. Hopefully, we can wind your portion up very quickly
    when we get back.
        Thank you. We stand in recess.
        [Brief recess.]
        Mr. Bilirakis. [continuing] a reform of the system. I don't
    know what would be. But let me ask you, Dr. McClellan. If we
    don't enact real reforms, do you expect these trends to
    continue? I guess I am asking the questions, and I suppose I
    know the answer has to be yes, but maybe you could explain that
    a little bit.
        Mr. McClellan. I think the answer is yes, and that is
    something we are hearing, as you said, uniformly from Governors
    in both parties, from all over the country. Their view, and the
    view of many is that the current program just isn't
    sustainable. And there will be reforms taking place, whether
    this committee acts or not. If you don't act, you are going to
    see more of the same, more benefits being reduced, optional
    populations being dropped, innovative approaches like home- and
    community-based services being limited, and payment rates being
    cut to the point that people don't have access----
        Mr. Bilirakis. So we are talking about reform is necessary
    to keep this from becoming a trend all over the country. Is
    that correct?
        Mr. McClellan. We need to give the Governors and the
    Medicaid program better tools to get high quality care to
    patients without spending more money. And I think the good news
    is that there is some clear evidence of ways in which we can do
    that, and some of the best examples are these home- and
    community-based programs that ought to be a more integral part
    of the Medicaid program, and I hope we will find a way to all
    work together to use these proven approaches, these evidence-
    based approaches----
        Mr. Bilirakis. Now, you have indicated, Doctor, and we have
    worked together on healthcare for many, many years, and you are
    a medical doctor, and I know that you care about patients. And
    additionally, you have shown a real caring over the years. So I
    would like to think that whatever it is we are going to be
    addressing here, it is always keeping the beneficiaries in
    mind. You know, we don't want to degrade them in any way, and
    force people out of the system, and somebody made the comment
    that these--they are being forced to take reverse mortgages, I
    am not sure whether that came out the way it was intended to
    come out, and as far as I know, they are not being forced to do
    that. If they are, I would like to know about it.
        Mr. McClellan. That is correct, and you know, I appreciate
    your comment, and the reason that I feel pretty passionately
    about this is because I have seen not only my own patients, but
    in this job, I get a chance to meet with groups like the
    National Center for Independent Living, ADAPT, and others who
    have firsthand patient and person-based organizations for the
    people who actually want to get better care in the Medicaid
    program, and they feel very passionately about that. That is
    the main reason that we ought to be here taking action on this
    issue----
        Mr. Bilirakis. Well--I mean--I think I have made it clear
    over the years, I won't be a party to hurting people who are
    deserving, as far as cuts are concerned and whatnot. I mean, I
    think the word cut is an inappropriate word. It is savings,
    but----
        Mr. McClellan. Right.
        Mr. Bilirakis. [continuing] the fact of the matter is that
    hopefully, those savings will result in more people, or less
    people being dropped and more people maybe even coming aboard.
        Dr. Holtz-Eakin, why--you know, we are slaves here
    legislatively to CBO, to your scoring. That was set up, I
    guess, by the Congress, so it is what we did to ourselves, and
    yet, I know there has got to be, well, I know I am running out
    of time here. I guess basically my question is very quickly, is
    why is there such a difficulty in reconciling what you all
    think regarding scoring versus what we think regarding scoring?
    Now, I realize that maybe you are more the experts, and we are
    in an ivory tower, and that sort of thing, but you know, we--a
    long time ago, we thought that there should be dynamic scoring,
    and we have taken over the Congress, and still, we don't have
    dynamic scoring.
        The Democrats had the same problems with scoring as we
    have. A lot of things that we talk here about some of the
    things that can be done here on long-term care and whatnot,
    chances are CBO would probably not give us any credit for any
    savings, if you will, in that regard.
        Very quick answer, because I know my time has expired.
        Mr. Holtz-Eakin. Well, some quick points in no particular
    order. First, on dynamic scoring. In--three years ago, CBO put
    out a full scale analysis of the President's budget proposals,
    that included all the feedbacks, including macroeconomic
    feedbacks, that was in the context of the dividend proposal. We
    have continued to do that every year. That--we have worked with
    the Budget Committees to make sure that that is useful to the
    Congress, and we are working with them to see if there are
    other areas where they would like more information of that
    type.
         On general issues, and why reasonable people don't see eye
    to eye on budget scoring, I think there are a couple of things
    that often come up. No. 1, differential information. That is
    one that can be fixed. Any time a member or staff has
    information that they think is superior to what we have, we
    encourage them to bring it to us to help us improve the scoring
    process.
        Second would be the degree to which we are providing a
    consensus estimate versus one which might be a deeply held but
    non-consensus estimate on the part of a member. I think that is
    often a source of disagreement, and I think it is a legitimate
    source of disagreement.
        And then the final is the degree to which we are capturing
    things that are in the legislation. And in the end, we score
    legislation. Often, members, in their heads, score their
    intent, and there are cases where the legislation doesn't match
    their intent, either because it requires implementation, it
    doesn't show up in the budget window, or it--there are just
    drafting problems. In any of those circumstances, I think the
    No. 1 thing is to make sure that neither side sits in isolation
    and stews about it. We need to have a good dialog and open
    communication to make sure we improve.
        Mr. Deal. The gentleman's time has expired.
        Mr. Bilirakis. Thank you, Mr. Chairman. I am sorry it
    took----
        Mr. Deal. Sure. Mr. Allen is recognized for 5 minutes.
        Mr. Allen. Thank you, Mr. Chairman, and thank you both for
    being here. Comments and a couple of questions.
        You know, I noticed the language in your testimony, Dr.
    McClellan. I am not going to attribute to you. I am sure
    someone else is paid to come up with this. The New Freedoms
    Initiative. The Money Follows the Person Initiative. The Real
    Choice Systems Change Grants. I mean, then you apply it to
    Maine, and I do appreciate the recognition of what Maine has
    done, but you began by saying to ensure people know about their
    options before entering a nursing home, this is your testimony,
    Maine required preadmission screening and periodic reassessment
    for all nursing home residents.
        We did that. It isn't about choice, really. It is not
    really about choice. It is about two things. No. 1, we
    constricted the number of nursing home beds over a period of
    time. We tightened up the certificate of need process, and
    there was a lot of pain in the nursing home industry in Maine
    over those years. It certainly wasn't a choice on their part.
    But beyond that, it was designed to move out of nursing homes
    those people who could be served either in a community-based
    setting or in their own homes. It was--and so, when I said
    earlier that people in nursing homes in Maine today belong in
    nursing homes for sure, I really meant that.
        We have done a lot between 1995 and 2002. This is just
    reading from your prepared testimony. The number of Medicaid
    nursing home residents in Maine decreased 18 percent, while the
    number of people receiving Medicaid and State-funded home and
    community-based services increased by 78 percent. We have made
    the transition that I think you are urging all of us to make.
    But when I look at the President's budget, and what is
    proposed, we are already, Maine is already facing a State
    Medicaid shortfall of $70 million for the next 2 year cycle,
    due to the FMAP going down 2 percentage points.
        One projection is, under the President's proposal, we would
    lose $307 million in Federal funding over the next 10 years,
    and you were saying, no, we need to find better tools without
    spending more money. This is healthcare, and my view is we are
    going to spend more money, because we have an aging population,
    and that just goes with the territory.
        But my first question is, given States that have already
    made the effort to move people out of nursing home care
    wherever it is possible, into home or community-based care, is
    that going to affect, in any way, the amount of reductions that
    we are expected to take compared to other States, with respect
    to the President's proposals?
        Mr. McClellan. Just first let me say that I appreciate your
    pointing out Maine's experience, where you have seen, as you
    pointed out, a 17 percent increase over 7 years, while more
    people are being served with long-term care assistance, and
    they are getting better results.
        If that were the rule and not the exception in Medicaid, we
    would be in a lot better shape, in terms of the overall
    sustainability of the program. So, that is what we would like
    to see happen in a lot of other States, and it is not happening
    right now around the country. Most Medicaid beneficiaries do
    not have a choice and are not asked these questions regularly
    about how they want to get their care.
        With respect to what the President's budget proposals mean
    for Maine----
        Mr. Allen. Would we catch a break?
        Mr. McClellan. Well, you are going to get some savings, you
    know. Some of the proposals that we have made for addressing
    the overpayments in prescription drugs and the asset transfer
    proposals are actually savings for States as well, and with
    respect to the intergovernmental transfers, we do want to make
    sure that we are implementing them in a way that doesn't have
    adverse impacts on populations that are intended to be served.
        And once again, there is good experience from which to
    learn. We have been working with lots of States to address and
    eliminate improper intergovernmental transfers, when we have
    the authority to do so under current law, and we have been able
    to do that successfully with most States. So we need to keep
    moving in that direction to spend the dollars effectively, and
    do it within the law.
        Mr. Allen. But if I can go back, improper intergovernmental
    transfers is one way, what you call improper, is one way that
    we have been able to care for as many people as we can, and I
    come back to what Mr. Bilirakis said. You know, it feels
    sometimes as if the administration has, you know, is fixed on
    the cost number, but isn't fixed on the beneficiaries. You
    know, we have got a healthcare system in this country, and that
    is the problem. I mean, the wheels are coming off this
    employer-based system, I think, and so we are struggling with
    Medicaid, particularly in a down economy with people losing
    their jobs, you know, and yet, there is no recognition that in
    the best of worlds, it won't be long-term care insurance or
    reverse mortgages. Something much more fundamental needs to
    happen here, which I think is a combination of efficiency and
    more revenue, but you don't get there without more revenue, but
    you have to have the efficiency as well, and that is--well, my
    time is up, but if you maybe have a quick comment.
        Mr. McClellan. I would agree with you. The first priority
    has to be what is best for beneficiaries, and again, that is
    what motivates our proposals on these reforms in Medicaid long-
    term care systems.
        They help more beneficiaries live a better life, and that
    ought to be the first thing that we care about. It just so
    happens you can do these things in a way that doesn't increase
    Medicaid spending. We have overwhelming evidence, including
    evidence from Maine, that these approaches lead to better
    results for more people, without increasing funds. If every
    State had only seen their Medicaid spending on long-term care
    go up by 17 percent over the last 7 years, we would be in much
    better shape than we are today.
        Mr. Allen. But Medicaid spending is still rising in Maine.
        Mr. McClellan. Well, right, and it is projected to rise
    under our budget, too----
        Mr. Allen. Yeah.
        Mr. McClellan. [continuing] by over 7 percent per year. We
    just need to make sure that money goes as far as possible in
    helping as many people who really need it as possible.
        Mr. Allen. Thank you.
        Mr. Deal. The gentleman's time has expired. Ms. Myrick is
    recognized for 5 minutes.
        Ms. Myrick. Thank you, Mr. Chairman. Thank you both for
    being here. And Dr. Holtz-Eakin, I have a question for you
    regarding the cost of long-term care. We all know it is going
    to go up. I think we are kidding ourselves if we say it is not.
    And what appears to be a declining availability of donated
    care. I happen to be one that thinks that is going to continue
    to happen, because of societal changes that have taken place
    from the way it used to be years ago, when everybody helped one
    another.
        My concern, and I would like you to, just to expand a
    little bit on some of the implications to that on our tax
    burden on the citizens and on the States, as were talking about
    before. If we don't shift to other utilizations, like greater
    utilization of long-term care insurance, private long-term care
    insurance.
        Mr. Holtz-Eakin. Well, I think that the outer bounds, you
    could pull out of the numbers we presented, and--doing
    arithmetic in my head is a dangerous thing, but the value of
    the donated care is hard to pin down. It has ranged from $50 to
    $200 billion in recent years. But suppose we picked $100
    billion as the value of that, and suppose that by whatever
    mechanism, it was translated to public sector budgets.
        That would be spending. Once it was spent, it would have to
    be financed somehow, and in the long run, that will mean higher
    taxes. If it is in Medicaid, $56 billion of that would be the
    Feds. The remainder would be at State and local governments,
    and you know, probably not 100 percent of it would show up on
    the government, but you could imagine a third, maybe a half,
    and that is a substantial additional need for resources, and it
    would show up in taxes in the long run.
        Ms. Myrick. Well, it just to me proves the need that we
    have got to do something. We can't go down the same road we
    have been going down, and expect to get a different result.
    Appreciate it.
        I yield back my time, Mr. Chairman.
        Mr. Deal. I thank the gentlelady. Mr. Green, do you have
    questions?
        Mr. Green. Thank you, Mr. Chairman. And Dr. McClellan and I
    agree that many individuals in need of long-term care would
    rather be at home, and we have that example in Texas, are in
    their communities and institutional setting. Your testimony
    reference our State of Texas, which has taken measures to allow
    individuals to move from institutions to the community, and
    yet, in our last Texas legislative session in 2003, they set
    limits on the individual costs of care for individuals. It is
    generally recognized that the cost of long-term care exceeds
    Medicaid reimbursements to the tune of $4.5 billion annually,
    and if you are in an institutional setting, and there is a cap
    on it, these costs are absorbed by the provider, you know,
    that. However, in the home and community setting, the low
    income families are left holding the bag. Because they don't
    have that ability, they don't have $4.5 billion. They are
    typically--they are taking their mom or their father in, or
    their aunt and uncle, and I worry that the only choice they
    really have will be between limiting either the scope or the
    quality of the care in an effort to make the ends meet.
        Does the President's plan to expand home and community-
    based services safeguard Medicaid beneficiaries from that
    situation, and ensure that States will provide our community-
    based Medicaid patients with quality care?
        Mr. McClellan. Absolutely. We have requirements now in
    place that we have strengthened in the past year for monitoring
    the quality and the safety of services provided in home- and
    community-based waiver programs. States are required to give us
    an update on those waivers on an ongoing basis, and every
    waiver that we get now incorporates these kinds of quality
    assurance and quality improvement steps into the actual waiver
    application, and to the actual waiver template, and I do think
    that it is important to look at how these systems actually
    perform. We need to keep a close eye on how satisfied
    beneficiaries are and whether they are really getting a better
    quality of life, which is absolutely our intent, and can be
    achieved.
        In fact, we have recently reorganized our Center for
    Medicaid and State Operations to have one whole office that
    focuses on the performance of the Medicaid program, and
    specifically, the performance of these kinds of waivers. So we
    are monitoring that more closely than ever before. It is an
    important part of a successful home- and community-based waiver
    program, and we will keep a close eye on it going forward.
        Mr. Green. Okay. And this is a question for either you or
    Dr. Holtz-Eakin, and I would like to talk about the Medicaid's
    Long-Term Care Insurance Partnership, as an incentive to folks
    who purchase long-term care insurance. If the panel could shed
    some light on whether the partnership has actually created
    overall savings in Medicaid, and if so, how much, and to what
    extent has this program encouraged specifically low and middle
    income individuals, and those most likely to become Medicaid
    long-term beneficiaries, to purchase that long-term insurance.
    Also, is there any Federal mandate that these long-term
    policies under these partnerships contain some type of minimum
    standard coverage, so people will know what they are buying?
        It is for both of you really.
        Mr. McClellan. Just a few comments. There are four States
    that adopted this before the Congressional moratorium was
    imposed, and I think one important bottom line is that for
    people who use these approaches to purchase long-term care
    policies, it does work. They don't end up going on Medicaid. It
    would obviously be more helpful if we could expand this program
    more widely. I think ideas like you are talking about for
    giving people advice and support about how to use these long-
    term care insurance policies to protect their assets, and get
    more control over how they get long-term care services, should
    be an important part of the expansion as well. It is a very
    important way to help protect people's assets and shift the
    burden from Medicaid to the private sector.
        Mr. Green. Dr. Holtz-Eakin, can you--I understood there was
    a concern that these partnerships actually cost Medicaid more
    money.
        Mr. Holtz-Eakin. When we priced the President's budgetary
    proposals in this area, we came out with what was a $45 million
    cost, a modest cost at best, but the key analytic issue is the
    degree to which the partnership policies draw their
    participants from those who would otherwise have simply bought
    a private long-term care insurance policy. And there is lots of
    survey evidence from, for example, participants in Indiana,
    that that is, in fact, how they looked at it. I could have
    bought my own long-term care insurance policy, and I chose this
    partnership one instead. If so, you won't get savings from that
    avenue. That, in fact, puts people on Medicaid more quickly.
    The other possibility is they come from a population that would
    otherwise not have any insurance whatsoever, in which case
    there would be savings.
        So the key issue is, where is the partnership policy
    drawing its participants, from those who would buy insurance on
    their own, or those who would be uninsured? Our estimate, based
    on what we know about the current participants, and those who
    were likely to be eligible, was that on balance, it would break
    so that it transferred people from the private insurance market
    to the partnership.
        Mr. Green. To the partnership. And that is a concern,
    because again, low income and middle income people have finite
    resources, but it needs to be reasonable enough that they can
    do it, and yet, still know what they are buying, so they don't
    pay for 5 years, and then, you know, 5 years later, they say I
    can't afford it, and so they drop it, and so, they've got
    nothing. But that is why there needs to be some kind of minimum
    standard, like we do for supplemental policies for Medicare.
        Mr. Holtz-Eakin. And if I could just add, I think this is
    part of the long-term goal of getting more people into long-
    term care insurance if they have got the means to do so. You
    know, people who are already in their seventies or eighties,
    and who are really on the edge of going--of needing these kinds
    of services aren't the main target for this program. It is
    people who are baby boomers, who may be coming into needing
    long-term care services over the next five or 10 years, so you
    are not going to see the short-term impact as much as you can
    make the Medicaid program more sustainable for the long term.
    If we have got the middle class buying and providing for their
    long-term care services more on their own, and this is one of a
    number of strategies to do that.
        Mr. Green. Okay. Thank you, Mr. Chairman.
        Mr. Deal. Mr. Shimkus is recognized.
        Mr. Shimkus. Excuse me. Thank you, and I appreciate you all
    coming in, and your patience, and I also thank the patience of
    the second panel, who we will eventually get to. But I wanted,
    since I had this time, I wanted to address--this is an
    important issue, these are important questions, and you know,
    actually, I am really proud of the Congress to start stepping
    into generational challenges, and grab a hold of some of these
    contentious issues, and they will be politicized, and they will
    be challenged, but I mean, that is what we are here for, to
    take on these hard choices. So I applaud the debate and the
    concerns.
        I have been involved for quite a few years now with the
    disability community, and am the cosponsor, along with my
    colleague, Danny Davis, on My House or MiCASSA, which is very
    similar, but more expansive of the--than the President's New
    Freedom Initiative. And I--so I really applaud the President.
    And I know the disability community is very excited about it,
    because it is going to give us a chance to prove the merits,
    and then, hopefully, we can roll it out to a bigger--one of the
    concerns the committee has, as we try to address this, is they
    use the terminology woodworking, and from my understanding, it
    addresses people who do not seek institutional care, but are
    using their own dollars to stay home, that then might, if the--
    as we would like, if the money follows the individual, there
    may be more demand on the dollars. Are you familiar--I mean, am
    I reading this analysis correctly? And why don't we--Dr.
    McClellan first, and Dr. Holtz-Eakin.
        Mr. McClellan. Well, there certainly have been concerns
    raised about woodworking, but that is why, I think, as you
    said, the committee and the Congress need to take this on in a
    more comprehensive way. You know, I think we are just not doing
    justice to long-term care policy in this country, when one of
    the best justifications we have for keeping in place a system
    that doesn't give individuals on Medicaid with a disability
    control is that gosh, this is the only kind of benefit we can
    provide that won't attract more people.
        I mean, it is the wrong justification and the wrong way to
    be providing long-term care. Certainly, the woodwork effect is
    something that we should be concerned about, but as we have
    seen, from many of the waivers that have been implemented,
    including experience in Arizona, there are ways to implement
    these programs that serve more people, that give people a
    choice, and that are manageable from a State budget standpoint.
        I mean, you are absolutely right that we are not going to
    make a difference in this problem if we come up with some
    approach that is going to cost States a lot more money. They
    don't have more money right now, but we have got enough
    evidence that these kinds of reforms can be done in a way that
    works, and that serves more people more effectively. And using
    the woodwork excuse is just not good policy.
        Mr. Holtz-Eakin. I think the recent evidence is this is an
    important part of policy design. I forget the exact numbers,
    but within Medicaid, home and community-based care in recent
    years has grown about 11 percent. Nursing home growth has been
    much lower, and that has largely to do with the numbers of
    bodies involved. So in designing a policy, you have to worry
    about those who are desirous of being in their homes, and who
    might now be in donated care moving on to a program like that.
        Mr. Shimkus. And Dr. Holtz-Eakin, when, in your formulary,
    in your statistical analysis, are you taking into consideration
    the return on the investment, and the ability of the disabled
    community to work and be productive, because they are staying
    at home, versus institutional care.
        Mr. Holtz-Eakin. In terms of direct feedback, so I am----
        Mr. Shimkus. Obviously, they could be in essence, then,
    working. They could be earning income, other issues there.
        Mr. Holtz-Eakin. It depends on the context. We could look
    at particulars, but we do try to trace through comprehensive,
    the impacts of any bill, and if that were to allow the disabled
    to work more, at some cost, but with some other implications
    for the budget, we would try to track those as well.
        Mr. Shimkus. Because there may be a revenue generator that
    might offset expenses. I am not sure. I am not a mathematician,
    or a----
        Mr. Holtz-Eakin. But the details, we would be happy to
    work----
        Mr. Shimkus. Thank you. Mr. Chairman, the last thing. That
    long-term care insurance, if offered, would it offer for long-
    term institutional care and for home care?
        Mr. McClellan. Yes, the policies that are around today give
    people a lot of flexibility about how they spend the money, and
    that is one of the nice features of it. Unlike Medicaid, which
    by statute, says institutional care, you can have more control
    over how you get long-term services. That is why it should be
    such an important part of financial planning for baby boomers
    and people who are approaching older ages.
        Mr. Shimkus. Well, and that is why I have--in support of
    the MiCASSA legislation, or the New Freedom, it does provide
    individuals more freedom to make the choices on their own. You
    are saying long-term care insurance would do the same thing.
        Thank you, Mr. Chairman. I yield back my time.
        Mr. Deal. I thank the gentleman. Mr. Strickland, do you
    have questions?
        Mr. Strickland. Thank you, Mr. Chairman. Dr. McClellan,
    following up on your interaction with Representative Allen
    regarding intergovernmental transfers, it would be helpful to
    us, and I am asking if you would be willing to provide us in
    writing the specifics of your policy regarding
    intergovernmental transfer. Would you be willing to do that,
    sir?
        Mr. McClellan. Well, we have, I know, provided some
    specifics already in the context of the budget, and that is
    what was estimated by our actuaries, and that is what the
    Congressional Budget Office used in their scoring. So we can
    certainly provide that level of detail, and I know we want to
    continue to have discussions with you and your staffs about
    exactly how these policies can be implemented. So, we will
    continue that, too.
        Mr. Strickland. Great. It would be also helpful if you
    could include in anything you provided to us what assumptions
    you are using in the development of your policy. That would be
    very helpful to us.
        Mr. McClellan. Okay. I can tell you as a general matter,
    that our actuaries don't do State-specific analyses. It is more
    of a calculation burden with 50 States, and all kinds of
    different programs and they do all they are able to do. They
    typically try to do as sophisticated models as they can with
    the resources we have, but that means, you know, looking at the
    different types of States and different categories, so I will
    try to get some of those assumptions to you.
        Mr. Strickland. I mean, if there could be some clarity, so
    that there, you know, are some specific understandings as to--
    --
        Mr. McClellan. Well, I appreciate that----
        Mr. Strickland. [continuing] as to what policies----
        Mr. McClellan. [continuing] is important. We need to get
    actual legislation.
        Mr. Strickland. Thank you, sir. And I have one question,
    but it is a little long, and the answer may be able to be
    short. But I wanted to ask you about the Family Opportunity
    Act, a bill that would allow families with disabled children,
    that may have incomes that are slightly above the Medicaid
    level, to buy into Medicaid coverage, so that their children
    would have access to the needed services that may not be
    readily available to them through any kind of affordable
    insurance coverage, and that being the case, then Medicaid
    becomes pretty much of a lifeline to these families. The
    administration did not include, I think I am right in saying,
    the administration did not include any funding for the Family
    Opportunity Act in its fiscal year 2006 budget, in spite of the
    fact that last year, the administration supported combining the
    Money Follows the Person with the Family Opportunity Act as a
    legislative initiative. Now, the chairman and the Ranking
    Members of the Energy and Commerce Committee, and I believe the
    Finance Committees worked together to draft the proposal.
    Instead, it seems, you know, from my vantage point, that the
    Medicaid program is going to be cut by $60 billion or so, and
    the administration has proposed cutting some of the very
    services that individuals with disabilities would need,
    targeted care case management, for example, which would help
    coordinate the care of a special needs child with multiple
    needs.
        Now, this legislation, as you know, has very strong
    bipartisan support, and has had for many years. Some of us were
    disappointed, given that, to see that the administration seems
    not to be willing to continue its support for this positive
    legislation. So, my question to you, after that long
    introduction, is does the administration continue to support
    the Family Opportunity Act? If it does, can you explain the
    lack of funding in the administration's budget for this
    purpose?
        Mr. McClellan. Well, Congressman, you are right. We didn't
    include new funding for the Family Opportunity Act in our
    budget. We have worked with States and made clear to States
    that they can use Medicaid waivers or SCHIP funds to provide
    the kinds of benefits that are included in FOA, but what we did
    last year was the same thing. We didn't have funding in our
    budget for the Family Opportunity Act. We did have support for
    a version of Money Follows the Person, and as you said, we all
    started working together, and we came up with an overall
    package that included these two important legislative
    proposals, that did have, as you said, considerable bipartisan
    support. We looked for ways to fund those recognizing that
    States don't have new money to contribute to Medicaid and that
    we have a tight Federal budget situation as well, and we made a
    lot of progress. We are open to that kind of bipartisan process
    again, where all of us work on the initiatives that are
    important to us, and we make progress together in getting it
    done. So I hope we can use the progress that we made last year
    as a model, and keep building on it this time around.
        Mr. Strickland. Okay. My time is up. I would like to follow
    up, but maybe we can do that at some other time.
        Mr. McClellan. Yes, and I would be glad to follow up with
    you and your staff on this issue.
        Mr. Strickland. Thank you, sir.
        Mr. McClellan. It is an important one.
        Mr. Strickland. Thank you, Mr. Chairman.
        Mr. Deal. Well, thank you gentlemen again for your
    patience, and for being with us today. We do appreciate it. We
    regret that it dragged on too long, but you are very kind to
    give your answers. We have some members who will be submitting
    written questions to you, if you could respond to those in
    writing as well.
        Thank you very much.
        Mr. McClellan. Thank you very much.
        Mr. Holtz-Eakin. Thank you.
        Mr. Deal. We will now call up the second panel. We are
    having a double header here today. Thank you for waiting
    around. I will introduce the panel, and then, we will begin
    immediately with your comments. Mr. Lee Page, who is the
    Associate Advocacy Director with the Paralyzed Veterans of
    America. Ms. Kathryn Allen, the Director of Health Care,
    Medicaid, and Private Health Insurance Issues of the U.S.
    Government Accountability Office. Ms. O'Shaughnessy, who is
    Specialist in Social Legislation, Domestic Social Policy
    Division of the Congressional Research Service. Ms. Karen
    Ignagni, is that right? Okay. It is pretty close, anyway. It is
    good for a Southern drawl it. It helps. President and CEO of
    America's Health Insurance Plans. Mr. Stephen Moses, who is
    President of the Center for Long-Term Care Financing. Mr.
    Bernard Krooks, who is an attorney with Littman Krooks. And
    Ms.--Dr. Barbara Stucki, who is Project Manager of the National
    Council for the Aging. And Ms. Jennie Chin Hansen, who is the
    Board of Directors of the AARP. And Dr. Feder, who is the Dean
    of the Public Policy Institute at Georgetown University.
        Ladies and gentlemen, we are pleased to have you with us,
    and thank you, once again, for your patience, and Mr. Page, we
    will begin with you.

     STATEMENTS OF LEE PAGE, ASSOCIATE ADVOCACY DIRECTOR, PARALYZED
     VETERANS OF AMERICA; KATHRYN G. ALLEN, DIRECTOR, HEALTH CARE,
     MEDICAID AND PRIVATE HEALTH INSURANCE ISSUES, U.S. GOVERNMENT
     ACCOUNTABILITY OFFICE; CAROL V. O'SHAUGHNESSY, SPECIALIST IN
         SOCIAL LEGISLATION, DOMESTIC SOCIAL POLICY DIVISION,
     CONGRESSIONAL RESEARCH SERVICE; KAREN IGNAGNI, PRESIDENT AND
         CEO, AMERICA'S HEALTH INSURANCE PLANS; STEPHEN MOSES,
      PRESIDENT, CENTER FOR LONG-TERM CARE FINANCING; BERNARD A.
     KROOKS, LITTMAN KROOKS LLP; BARBARA STUCKI, PROJECT MANAGER,
    THE NATIONAL COUNCIL OF THE AGING; JENNIE CHIN HANSEN, BOARD OF
    DIRECTORS, CLASS OF 2008, AARP; AND JUDITH FEDER, DEAN, PUBLIC
                POLICY INSTITUTE, GEORGETOWN UNIVERSITY

        Mr. Page. Okay. Thank you, Mr. Chairman, and thank you,
    other members of the committee. I really appreciate the
    opportunity to be here today to talk about this very important
    subject. Again, my name is Lee Page, and I am an Associate
    Advocacy Director for PVA, which is Paralyzed Veterans of
    America. It is a national Veterans Service Organization
    dedicated to meeting the needs of its members, which are all
    veterans of military service with spinal cord injury or
    disease. I also serve as a co-chair of the Long-Term Services
    and Supports Taskforce of the Consortium of Citizens with
    Disabilities, CCD, and then also work very closely with a
    number of consumer-led grassroots organizations whose mission
    is to work for long-term services and supports.
        We have had a very interesting morning this morning,
    listening to a lot of different comments, and it is--all sounds
    very enlightening and good news to me, in reference to the way
    everyone is engaged on this topic and subject. But what I will
    focus on in my comments is mainly people with disabilities and
    how they interact with the Medicaid system. That means non-
    elderly people that are 65 and younger people with
    disabilities, and those who are non-veterans also.
        The first thing I would like to say is that, to echo, which
    I have heard a lot of today already, is that I believe we need
    to improve and expand access to community-based long-term
    services and supports. Currently, Medicaid has a spending bias
    based on a 1965 medical model that refers 70 percent of funding
    toward the institutional settings, and institutional care,
    which only allows 30 percent for community or home-based long-
    term care services. And here we are at the dawn of the 21st
    century, and 15 years after the ADA was passed, and people with
    disabilities are being integrated into all aspects of society,
    and yet, we have certain policies that were being debated and
    possibly implemented that will actually send people back into
    isolation.
        In order to reverse this, I believe the real and lasting
    progress in this regard will be made only if Congress protects
    the fundamental structure of this program, Medicaid. Critical
    features of Medicaid that must be protected include an
    enforceable individual entitlement to coverage, a strong
    Federal State partnership, a Federal--which guarantees--which
    the Federal Government guarantees that will match State
    spending, no matter how many people are in the program, or how
    many it serves, or how costly the care is to those individuals.
        Critical consumer protections that ensure that with, that
    ensure that all Medicaid beneficiaries have the right to be
    treated equally, and have the right to receive Medicaid covered
    services when they are medically necessary. Recently, we have
    heard a lot of talk about references of flexibility to be
    granted to the States, and that is a very interesting subject,
    because the way that disability interprets the word
    flexibility, unfortunately in the long run, ends up being a
    little bit discriminatory toward those people with
    disabilities. What I mean by that is saying that the
    flexibility this proposed would permit States to make arbitrary
    distinctions between Medicaid beneficiaries on the basis of
    whether they fall into a mandatory or an optional category.
    This has nothing to do whatsoever with the level of disability,
    the need for services, or any other factor that justifies
    desperate treatment.
        Furthermore, this also calls, this flexibility would permit
    States to ignore current Medicaid rules that ensure that
    services can be delivered fairly, such as requirements that
    benefits must be compared across beneficiary groups, and since
    Medicaid service is provided only when they have been
    prescribed by a qualified health professional. So basically,
    the flexibility could, in some instances, take away care that
    has been prescribed.
        Furthermore, the majority of Medicaid spending for people
    with disabilities falls into the optional services. What we
    consider optional, what, you know, what the States may consider
    optional services, Medicaid administrators may--might consider
    them optional services. People with disabilities basically
    depend on those services to be independent and fully
    participate in the mainstream of societies.
        Example is, say you have got a 35 year old man who has
    schizophrenia and basically has to have prescription drugs
    three or four times a day to maintain his recurrence of
    symptoms, or he would be--end up--be put back in the
    institution. Or a 25 year old woman who has CP or muscular
    dystrophy, or some other degenerative disease that she would
    need a wheelchair or power wheelchair in order to get from
    point A to point B, which would include going back to work
    part-time. Or a man who is 30 years old who has sustained a
    spinal cord injury, result in quadriplegia, would need
    attendant care services, such as bathing, getting dressed in
    the morning, and transferring in and out of his wheelchair or
    transportation in order to get him to go back to school, or to
    participate in the mainstream of society. That is just some of
    the issues.
        I would like to turn, also, toward, you know, Medicaid as
    its role in providing long-term services. Let us see. We know
    that Medicaid is the largest source of funding for long-term
    care. The--and unfortunately, the private insurance market
    generally does not provide long-term services. Medicare's
    coverage for long-term care services is very limited. People
    with disabilities often end up in Medicaid because it is the
    only place they can turn to to receive the array of services
    and supports that they need to survive.
        Mr. Deal. Mr. Page, your time has expired. Would you
    summarize for us, please, sir?
        Mr. Page. Certainly. I am--I didn't realize time was
    slipping away that quick.
        Summarize. I guess overall, what I would like to say is we
    have--I am encouraged by the fact that Dr. McClellan was here,
    and was talking about different options on ways to implement
    avenues that will affect people with disabilities, his Money
    Follows the Person, we are all behind that, in reference to
    that, there is also the Family Opportunity Act, which he--was
    mentioned by some of the other members.
        And MiCASSA was mentioned by Mr. Shimkus. All these are
    legislative avenues that can work to increase home and
    community-based services. They have also all been before this
    committee for a number of years, and it is a matter of a little
    bit of political will, also. And what the disability community
    has found is that we are willing to come here and work with you
    to get this job done, as a matter of urgency and a point of
    time, which is now, because if it is not done today, when is it
    going to be done, and if it is not you, who will it be? Thank
    you.
        [The prepared statement of Lee Page follows:]

    Prepared Statement of Lee Page, Associate Advocacy Director, Paralyzed
                              Veterans of America

        Mr. Chairman, members of the Committee, my name is Lee Page. I am
    an Associate Advocacy Director for the Paralyzed Veterans of America
    (PVA). PVA is a non-profit national Veterans Service Organization
    chartered by the Congress of the United States and dedicated to meeting
    the needs of its members--veterans of military service who are
    paralyzed as a result of spinal cord injury or disease. While almost
    all PVA members rely on the Department of Veterans Affairs for health
    care and support services, potential changes to the VA system may have
    ramifications for other federal programs such as Medicaid. I also serve
    as a Co-Chair of the Long-Term Services and Supports Task Force of the
    Consortium for Citizens with Disabilities (CCD), a Washington-based
    coalition of a more than 100 national disability consumer, provider,
    and advocacy organizations. I work very closely with a range of
    national consumer-led disability organizations. As the Congress
    considers a range of policy options with regard to restructuring of
    Medicaid long-term services, I am here to offer a perspective from
    people with disabilities. I will focus my comments on issues affecting
    non-elderly people with disabilities. For non-veteran people with
    disabilities, Medicaid is perhaps the most critical program essential
    to their well-being. Let me also add the observation that cuts of the
    magnitude contemplated in the budget resolution will preclude any
    positive reforms that will be meaningful to the many people with
    disabilities who rely on Medicaid.
        The first point that I would like to make is that more must be done
    to improve and expand access to community-based long-term services and
    supports. Currently, Medicaid has a spending bias based on a 1965
    medical model that refers 705% of funding towards institutional
    settings and allows only 3025% for community and home based long term
    supports and services.\1\ At the dawn of the 21st century and 15 years
    after the passage of the Americans with Disabilities Act (ADA), people
    with disabilities are being integrated into all aspects of society. And
    yet, for the many people with disabilities that rely on Medicaid
    services, policies are being implemented or contemplated that will
    drive them back into isolation.
        I believe that real and lasting progress in this regard will be
    made only if Congress protects the fundamental structure of the program
    that has enabled Medicaid to be a source of progress for the past four
    decades. Critical features of Medicaid that must be protected include
    an enforceable individual entitlement to coverage; the strong federal-
    state partnership, in which the federal government guarantees that it
    will matches state spending, no matter how many people the program
    serves or how costly the critical Medicaid services that are provided;
    and critical consumer protections that ensure that, with limited
    exceptions, all Medicaid beneficiaries have a right to be treated
    equally and have a right to receive Medicaid covered services when they
    are medically necessary.
        Recently, HHS Secretary Leavitt has made statements that he
    believes that states should be given greater ``flexibility'' with
    regard to Medicaid's so-called optional populations and optional
    services.\2\ From the disability community's perspective, this so-
    called flexibility is more appropriately characterized as
    discrimination. The flexibility that is proposed would permit states to
    make arbitrary distinctions between Medicaid beneficiaries on the basis
    of whether they fall into mandatory or optional categories. This has
    nothing whatsoever to do with the level of disability, the need for
    services, or any factor that could justify disparate treatment.
    Furthermore, this so-called flexibility would permit states to ignore
    current Medicaid rules that ensure that services are delivered fairly--
    such as the requirement that benefits must be comparable across
    beneficiary groups. Since Medicaid services are provided only when they
    have been prescribed by qualified health professionals, this so-called
    flexibility could only lead to some Medicaid services being denied to
    people who need them. It is important to note that a significant
    proportion of people with disabilities qualify for Medicaid through
    optional eligibility categories. Further, the majority of Medicaid
    spending on people with disabilities is on optional services.\3\
    Optional services are mainly disability focused. What may be considered
    optional by states and Medicaid administrators in some cases may be
    essential to a person's efforts to remain independent and fully
    participate in the mainstream of society.
        For Medicaid beneficiaries with disabilities, optional services are
    not optional. A 35 year old man with schizophrenia may have to take
    three prescriptions daily to avoid recurrence of symptoms that would
    place him in an institution. A 25 year old woman with cerebral palsy
    needs her wheelchair to continue to work part time. A 30 year old man
    who sustained a spinal cord injury resulting in quadriplegia needs
    attendant care in bathing, getting dressed, eating and transferring in
    order to go back to school.
        I would like to turn to the important role of Medicaid in providing
    long-term services and supports to people with disabilities. In
    addition to Medicaid's role in providing a range of acute care services
    to people with disabilities, many people with serious and long-lasting
    disabilities end up on Medicaid because they require long-term services
    and supports. Medicaid is the largest source of funding for long-term
    care. The private insurance market generally does not provide long-term
    services, and Medicare's coverage for long-term services is very
    limited. People with disabilities often end up on Medicaid because it
    is the only place that they can turn to receive the array of services
    and supports that they need to survive. For people who are less
    familiar with these issues, long-term services and supports are
    generally non-medical services that provide assistance with core
    activities of everyday life such as eating and preparing meals,
    dressing and toileting, and managing a home or personal finances. These
    services are a critical part of the Medicaid program and were defined
    in the program's statutory purpose: ``and (2) rehabilitation and other
    services to help such families and individuals attain or retain
    capability for independence or self care . . .''
        I know that some proponents have advocated for a greater reliance
    on private long-term care insurance as a policy response to growing
    Medicaid costs for long-term care. I am skeptical that, without
    fundamental restructuring and greater regulation of the long-term care
    market, private long-term care insurance can ever develop into a viable
    tool for retirement planning or for helping individuals and families to
    plan for long-term care needs later in life. However, it is clear that
    private long-term care insurance is not a policy solution for financing
    the long-term care needs of non-elderly people with disabilities. These
    policies were not developed for children, young adults and younger
    working people--and in the current market, such coverage would be
    unavailable or unaffordable to people with disabilities.
        While Medicaid plays an essential role in providing long-term
    services, this is also an area where the program must do better. People
    with disabilities are looking to the Congress to urgently address
    barriers that prevent millions of Medicaid beneficiaries with
    disabilities from receiving community-based long-term services.
    Medicaid law requires states to provide nursing home care, without
    requiring states to provide the same level and types of services in the
    community. This is the ``institutional bias.'' Hundreds of thousands of
    people with disabilities would like to and could live in their own home
    and community, if they received long-term services and supports that
    enable them to do so. According to CMS' Minimum Data Set--Nationally,
    there are 1,404,406 persons (by definition they are disabled) residing
    in nursing homes of whom 19.5% (273,859 disabled persons) have stated
    they want to live in the community. But these individuals are forced to
    be segregated in an institution as their only option for receiving this
    assistance.
        Virtually all policy makers agree with the disability community
    that we need to rebalance the Medicaid long-term care system so that
    all Medicaid beneficiaries have the option of receiving long-term
    services in their homes and communities. This issue was given momentum
    five years ago when the United States Supreme Court held in its
    Olmstead \4\ decision that the unjustified institutional isolation of
    people with disabilities is discriminatory and unlawful under the
    Americans with Disabilities Act. While this decision has enormous
    implications for Medicaid, it did not change the Medicaid law or
    require an end to the institutional bias. The disability community's
    preferred solution is for the Congress to swiftly enact the Medicaid
    Community Attendant Services and Supports Act (MiCASSA), H.R. 910 and
    S. 401 and HR 910. This legislation would mandate that states offer
    home and community based services for those individuals with
    disabilities who are in or are eligible for institutional settings.
    Some policy makers have misgivings with the MiCASSA model out of
    concern for the potential cost. While we believe that the only
    meaningful solution to the challenge of providing expanded access to
    community-based services will require new resources, the disability
    community is also supportive of several other initiatives that would
    make incremental progress toward enacting achieving MiCASSA's goals.
        This includes strongly supporting the Money Follows the Person Act,
    S. 528, an important first step that would provide competitive
    demonstration projects to enable Medicaid-eligible individuals to
    receive long-term services in the setting of their choice. States would
    receive expanded funding for one year for each person that a state
    moves out of a nursing home or other institution into the community
    with appropriate services. We have worked closely with Dr. McClellan
    and the Bush Administration on this initiative which is a central
    element of the President's New Freedom Initiative of 2001. However,
    after 5 years, the Bush administration has failed to put forth
    comprehensive legislation addressing the goals of the New Freedom
    Initiative, including any proposal to assist states' compliance with
    the Supreme Court's Olmstead decision.
        Please note we also support companion legislation, the Family
    Opportunity Act, that would provide states with the option to provide
    critical support for families with children with serious disabilities.
    At the end of the 108th Congress, this Committee linked the two pieces
    of legislation (FOA and Money Follows the Person) in hopes of moving
    them together for passage. Unfortunately, that did not happen. We had
    hoped that the legislation would be introduced as a package in the
    109th Congress, sending a strong message that Congress and the
    Administration are ready to move this issue. Unfortunately, this has
    not yet happened.
        Additionally, we believe there are other incremental steps that the
    Congress can take to expand access to community-based long-term
    services. Twenty-nine 29states provide community long-term services
    through use of the personal care option and 44 states rely on the
    rehabilitation services option. These are critical optional services
    that states have relied upon to develop innovative models for providing
    community-based long-term services.\5\ We believe that the federal
    government could assist states in rebalancing their long-term care
    programs through providing an enhanced match for personal care and
    rehabilitation services. These approaches could be phased in over time.
        It is seductive to think that easy solutions are out there for
    improving Medicaid. Some claim that reverse mortgages are a policy
    innovation that will assist Medicaid beneficiaries in financing the
    cost of long-term services and supports--in a way that lowers federal
    costs. Similarly, several Members of Congress and the Bush
    Administration have proposed new restrictions on the transfer of assets
    before individuals qualify for Medicaid coverage. Easy solutions do not
    exist and the potential benefits of reverse mortgages or asset transfer
    restrictions are being oversold. More importantly, however, these
    policies are largely irrelevant to non-elderly people with
    disabilities. Non-elderly people with disabilities have lower incomes
    and fewer resources than many seniors. Many people with disabilities
    have not had the opportunity to accumulate assets. They have not built
    up significant equity in their homes with which to take a reverse
    mortgage and that assumes they can afford to own a home. Moreover, as
    with other non-elderly individuals, policy makers should be encouraging
    people with disabilities to accumulate assets for use in their later
    years, making reverse mortgages particularly inappropriate for these
    individuals.
        In conclusion, as has happened several times in the past, Medicaid
    is at a critical juncture. The actions of this Congress will determine
    whether or not Medicaid continues to evolve and adapt to improve the
    lives of people with disabilities and other Medicaid beneficiaries. It
    is hard to imagine, however, how positive progress can be made if the
    Congress enacts large Medicaid cuts--such as the $10 billion in savings
    that are being contemplated per the budget resolution. Our perspective
    is that Medicaid is an effective model of a flexible, adaptable, and
    working public program that should be expanded and not cut. By
    protecting the core features of Medicaid, it will continue to serve as
    a mechanism for achieving an important national goal--and necessity--to
    assist people with disabilities to live full and meaningful lives,
    integrated fully in their communities. I urge Congress to look beyond
    the short-term budget debate and enact forward-looking policies that
    people with disabilities and all Americans can applaud.

        Mr. Deal. Thank you. Ms. Allen.

                      STATEMENT OF KATHRYN G. ALLEN

        Ms. Allen. Mr. Chairman, Mr. Brown, and members of the
    subcommittee, thank you for inviting me to be part of this very
    important hearing today.
        Earlier this year, GAO issued a report to coincide with the
    convening of this Congress, a report entitled ``21st Century
    Challenges: Reexamining the Base of the Federal Government.''
    That report provides a very comprehensive compendium of areas
    throughout government that may warrant reconsideration in
    today's fiscal climate. One question posed in that report, and
    which is very germane to today's hearing, is the question, what
    options are there for rethinking the Federal, State, and
    private insurance roles in financing long-term care?
        In general, the aging of this baby boom generation, of
    which I am a member, will lead to a very sharp growth in
    Federal entitlement spending that, without meaningful reforms,
    will represent an unsustainable burden on future generations.
    If you look at the chart that we have displayed, we see that
    Federal spending for three major entitlement programs which
    serve persons needing long-term care, Medicaid, Medicare, and
    Social Security, will nearly double as a share of the economy
    by the year 2035, and will triple by the year 2080. This
    represents a growth from 8.5 percent of GDP to about 25 percent
    just for these three programs. And Federal spending for
    Medicaid alone, exclusive of State spending, could increase to
    as much as 5 percent. Now, recently, much attention has been
    focused on the need for Social Security and Medicare reform, in
    order to maintain their viability and ability to meet future
    commitments, but a broader focus would also look at Medicaid.
    As we have heard today already, about two-thirds of the entire
    Medicaid program is dedicated to services for persons who are
    aged and disabled, although they represent only one-fourth of
    the beneficiaries.
        Medicaid also accounts for one of the largest components of
    most States' budgets. As we can see in the next graphic, it is
    a pie chart, that two thirds of all spending now for long-term
    care, regardless of the age of the beneficiary, is paid for by
    the public sector. Medicaid alone accounts for almost half of
    this care, about 48 percent. I would note, though, that this
    chart differs from the one that Dr. Holtz-Eakin presented,
    because we did not factor in the cost of informal or donated
    care.
        In coming decades, the sheer number of aging baby boomers
    is going to swell the numbers of elderly with disabilities and
    the need for long-term care. We have heard about this already,
    but this new demand is going to exacerbate the problems we
    already see. The problems we see today include an inability to
    obtain the care that is needed at home or in the community, and
    we see long-term care costs that could be financially
    catastrophic for families. We see the continuing geographic
    dispersion of families, which reduces the number of informal,
    unpaid family caregivers who help elderly persons stay in their
    homes and live independently as long as possible.
        And considering the options and the hard choices that we
    need to confront for long-term care financing, we have to keep
    in mind that long-term care is not just about healthcare. It
    comprises a variety of services that persons who are aged or
    disabled need beyond medical care to maintain their quality of
    life. These additional services include housing,
    transportation, nutrition, and social support to help them
    continue to live independently. With this in mind, there are
    several issues that I would like to put on the table that
    people need to consider in exploring long-term care financing
    alternatives.
        I am going to highlight just three, and there are others in
    my written statement. The first consideration is determining
    societal versus personal responsibilities. A fundamental
    question we need to address is how much the choices of how
    long-term care needs are met should depend on an individual's
    own resources, or the extent to which society should supplement
    those resources to broaden their range of choices. Now, this is
    particularly true for persons with severe disabilities, who
    have a limited capacity to produce income. A related question
    is the extent to which societal responsibility includes
    providing a minimum safety net, or some form of social
    insurance, that is consistent for all individuals in similar
    circumstances regardless of where they live within a State or
    across the country.
        A second consideration is personal preparedness. The public
    sector has a very important role in this regard, including
    educating people about the current division between personal
    and societal responsibilities. Only if the limits of public
    support are clear will individuals be likely to take steps
    needed to prepare for any possible disability. Currently, one
    of the factors contributing to the lack of preparation for
    long-term care is a widespread misunderstanding about what
    services Medicare or their own private health insurance will
    cover. Another public role may be to encourage the availability
    of sound private long-term care insurance policies. We are
    hopeful that the Federal Government's own experience in
    offering long-term care insurance, began just two or 3 years
    ago, will be instructive in this regard.
        Mr. Chairman, the last consideration that I will mention
    concerns the need to recognize the benefits, the burdens, and
    the cost of informal care giving. As you well know, as you have
    pointed out today, family members and other informal caregivers
    play a critical role in supplying the needs of these
    individuals. Effective policy may address incentives and
    supports that enable informal caregivers and family members to
    continue providing assistance, while taking care to also avoid
    creating incentives that would supplant that informal care with
    paid or public services. And as already mentioned today, it is
    also important to note the physical, emotional, and social
    burdens that providing care imposes on the caregiver, and its
    economic cost to the caregiver and society.
        Mr. Chairman, these and other considerations will require
    some very difficult policy choices, and the GAO stands ready to
    support you and the rest of the Congress in looking at the
    facts, and analyzing the facts, to help make those choices.
    Thank you.
        [The prepared statement of Kathryn G. Allen follows:]

    Prepared Statement of Kathryn G. Allen, Director, Health Care--Medicaid
         and Private Health Insurance Issues, United States Government
                             Accountability Office

        Mr. Chairman and Members of the Subcommittee: I am pleased to be
    here today as you discuss the anticipated growing demand and associated
    costs for long-term care services, which will be driven largely by the
    aging baby boom generation, and the challenges that increased demand
    will bring for federal and state budgets. Earlier this year, we issued
    a report entitled 21st Century Challenges: Reexamining the Base of the
    Federal Government to provide policymakers with a comprehensive
    compendium of those areas throughout government that could be
    considered ripe for reexamination and review based on our past work and
    institutional knowledge.1 In that report, we presented
    illustrative questions for policymakers to consider as they carry out
    their responsibilities. These questions examined major areas of the
    budget and federal operations including discretionary and mandatory
    spending, and tax policies and programs. One prominent question that we
    raised in that report and that will be the focus of my comments today
    is ``What options are there for rethinking the federal, state, and
    private insurance roles in financing long-term care?''
    ---------------------------------------------------------------------------
        \1\ GAO, 21st Century Challenges: Reexamining the Base of the
    Federal Government, GAO05325SP (Washington, D.C.: February 2005).
    ---------------------------------------------------------------------------
        In general, the aging of the baby boom generation will lead to a
    sharp growth in federal entitlement spending that, absent meaningful
    reforms, will represent an unsustainable burden on future generations.
    As the estimated 76 million baby boomers born between 1946 and 1964
    become elderly, Medicare, Medicaid, and Social Security will nearly
    double as a share of the economy by 2035. We have been able to sustain
    these entitlements in the past with low depression-era birth rates and
    a large postwar workforce. However, absent substantive reform of
    entitlement programs, a rapid escalation of federal spending for Social
    Security, Medicare, and Medicaid is virtually certain to overwhelm the
    rest of the federal budget.
        Most attention has been focused on the need for Social Security and
    Medicare reform in order to maintain their viability and ability to
    meet programmatic commitments. By 2017, Social Security's cash income
    (tax revenue) is projected to fall below program expenses. At that
    time, Social Security will join Medicare's Hospital Insurance Trust
    Fund, whose outlays exceeded cash revenues in 2004, as having a cash
    flow deficit. While these are important issues, a broader focus should
    also include Medicaid, particularly as it involves financing long-term
    care. Long-term care includes an array of health, personal care, and
    supportive services provided to persons with physical or mental
    disabilities. It relies heavily on financing by public payers,
    especially Medicaid, and has significant implications for state budgets
    as well as the federal budget.
        My remarks today will focus on (1) the pressure that entitlement
    spending for Medicare, Medicaid, and Social Security is expected to
    exert on the federal budget in coming decades; (2) how the aging of the
    baby boomers will increase the demand for long-term care services; and
    (3) how these trends will affect the current and future financing of
    long-term care services, particularly in federal and state budgets. I
    will also highlight several considerations for any possible reforms of
    long-term care financing. My comments are based on prior GAO work,
    particularly a 2002 testimony by the Comptroller General.2
    We updated prior GAO work by including more recent data from GAO's
    budget simulation model, the Centers for Medicare & Medicaid Services,
    and the U.S. Census Bureau as well as the literature. We conducted our
    work to update this earlier testimony from February through April 2005
    in accordance with generally accepted government auditing standards.
    ---------------------------------------------------------------------------
        \2\ GAO, Long-Term Care: Aging Baby Boom Generation Will Increase
    Demand and Burden on Federal and State Budgets, GAO02544T (Washington,
    D.C.: March 21, 2002).
    ---------------------------------------------------------------------------
        In summary, it is clear that, taken together, Medicare, Medicaid,
    and Social Security represent an unsustainable burden on future
    generations. Increased demand for long-term care, which will be driven
    in part by the aging baby boom generation, will contribute further to
    federal and state budget burdens. Estimates suggest the number of
    disabled elderly who cannot perform basic activities of daily living
    without assistance may as much as double from 2000 through 2040.
    Current problems with the provision and financing of long-term care
    could be exacerbated by the swelling numbers of the baby-boom
    generation needing care. These problems include whether individuals
    with disabilities receive adequate services, the potential for families
    to face financially catastrophic long-term care costs, and the burdens
    and social costs that heavy reliance on unpaid care from family members
    and other informal caregivers create coupled with possibly fewer
    caregivers available in coming generations. Long-term care spending
    from all public and private sources, which was about $183 billion for
    persons of all ages in 2003, will increase dramatically in the coming
    decades as the baby boom generation ages. Spending on long-term care
    services just for the elderly is estimated to increase from 2000 by
    more than two-and-a-half times by 2040 and could nearly quadruple in
    constant dollars to $379 billion by 2050, according to some estimates.
    Without fundamental financing changes, Medicaid--which pays over one-
    third of long-term care expenditures for the elderly--can be expected
    to remain one of the largest funding sources, straining both federal
    and state governments.
        In considering options for reforming long-term care financing in
    light of these anticipated demands for assistance and budgeting
    stresses, it is important to keep in mind that long-term care is not
    just about health care. It also comprises a variety of services an aged
    and/or disabled person requires to maintain quality of life--including
    housing, transportation, nutrition, and social support to help maintain
    independent living. Given the challenges in providing and paying for
    these myriad and growing needs, several considerations for shaping
    reform proposals include:

     determining societal responsibilities;
     considering the potential role of social insurance in financing;
     encouraging personal preparedness;
     recognizing the benefits, burdens, and costs of informal caregiving;
     assessing the balance of state and federal responsibilities to ensure
            adequate and equitable satisfaction of needs;
     adopting effective and efficient implementation and administration of
            reforms; and
     developing financially sustainable public commitments.

                                   BACKGROUND

        Long-term care includes many types of services needed when a person
    has a physical or mental disability. Individuals needing long-term care
    have varying degrees of difficulty in performing some activities of
    daily living without assistance, such as bathing, dressing, toileting,
    eating, and moving from one location to another. They may also have
    trouble with instrumental activities of daily living, which include
    such tasks as preparing food, housekeeping, and handling finances. They
    may have a mental impairment, such as Alzheimer's disease, that
    necessitates assistance with tasks such as taking medications or
    supervision to avoid harming themselves or others. Although a chronic
    physical or mental disability may occur at any age, the older an
    individual becomes, the more likely a disability will develop or
    worsen.
        According to the 1999 National Long-Term Care Survey, approximately
    7 million elderly had some sort of disability in 1999, including about
    1 million needing assistance with at least five activities of daily
    living.3 Assistance takes place in many forms and settings,
    including institutional care in nursing homes or assisted living
    facilities, and home care services. Further, many disabled individuals
    rely exclusively on unpaid care from family members or other informal
    caregivers.
    ---------------------------------------------------------------------------
        \3\ See Kenneth G. Manton and XiLiang Gu, ``Changes in the
    Prevalence of Chronic Disability in the United States Black and
    NonBlack Population Above Age 65 from 1982 to 1999,'' Proceedings of
    the National Academy of Sciences of the United States of America, vol.
    98, no. 11, (2001). The National Long-Term Care Survey was conducted in
    1982, 1984, 1989, 1994, 1999, and 2004, but the 2004 results are not
    yet available.
    ---------------------------------------------------------------------------
        Nationally, spending from all public and private sources for long-
    term care for all ages totaled about $183 billion in 2003, accounting
    for about 13 percent of all health care expenditures.4 About
    69 percent of expenditures for long-term care services were paid for by
    public programs, primarily Medicaid and Medicare. Individuals financed
    about 20 percent of these expenditures out of pocket and, less often,
    private insurers paid for long-term care. Moreover, these expenditures
    did not include the extensive reliance on unpaid long-term care
    provided by family members and other informal caregivers. Figure 1
    shows the major sources financing these expenditures.
    ---------------------------------------------------------------------------
        \4\ Based on our analysis of data from the Office of the Actuary of
    the Centers for Medicare & Medicaid Services and The MEDSTAT Group.
    These figures include long-term care for all people, regardless of age.
    ---------------------------------------------------------------------------
        Medicaid, the joint federal-state health-financing program for low-
    income individuals, continues to be the largest funding source for
    long-term care. Medicaid provides coverage for poor persons and for
    many individuals who have become nearly impoverished by ``spending
    down'' their assets to cover the high costs of their long-term care.
    For example, many elderly persons become eligible for Medicaid as a
    result of depleting their assets to pay for nursing home care that
    Medicare does not cover. In 2003, Medicaid paid 48 percent (about $87
    billion) of total long-term care expenditures. States share
    responsibility with the federal government for Medicaid, paying on
    average approximately 43 percent of total Medicaid costs in fiscal year
    2002.5 Eligibility for Medicaid-covered long-term care
    services varies widely among states. Spending also varies across
    states--for example, in fiscal year 2000, Medicaid per capita long-term
    care expenditures ranged from $73 per year in Nevada to $680 per year
    in New York. For the national average, about 57 percent of Medicaid
    long-term care spending in 2002 was for the elderly. In 2003, nursing
    home expenditures dominated Medicaid long-term care expenditures,
    accounting for about 47 percent of its long-term care spending. Home
    care expenditures make up a growing share of Medicaid long-term care
    spending as many states use the flexibility available within the
    Medicaid program to provide long-term care services in home- and
    community-based settings.6 From 2000 through 2003, home and
    personal care expenditures grew at an average annual rate of 15.9
    percent compared with 4.0 percent for nursing facility spending.
    Expenditures for Medicaid home- and community-based services for long-
    term care almost doubled from 1998 to 2003--from about $10 billion to
    about $19 billion.
    ---------------------------------------------------------------------------
        \5\ The federal share of Medicaid funding varies by state and is
    based on a state's per capita income in relation to the national per
    capita income. By statute, the federal share of Medicaid expenditures
    across individual states may range from 50 to 83 percent. 42 U.S.C.
    1396 d (b) (2000).
        \6\ Through Medicaid home- and community-based services, states
    cover a wide variety of nonmedical and social services and supports
    that allow people to remain in the community. These services include
    personal care, personal call devices, homemakers' assistance, chore
    assistance, adult day health care, and other services that are
    demonstrated as cost-effective and necessary to avoid
    institutionalization. In their home- and community-based services
    programs, however, states often limit eligibility or the scope of
    services in order to control costs.
    ---------------------------------------------------------------------------
        Other significant long-term care financing sources include:

     Individuals' out-of-pocket payments, the second largest source of
            long-term care expenditures, accounted for 20 percent (about
            $38 billion) of total expenditures in 2003. The vast majority
            (82 percent) of these payments were used for nursing home care.
     Medicare spending accounted for 18 percent (about $33 billion) of
            total long-term care expenditures in 2003. While Medicare
            primarily covers acute care, it also pays for limited stays in
            post-acute skilled nursing care facilities and home health
            care.
     Private insurance, which includes both traditional health insurance
            and long-term care insurance, 7 accounted for 9
            percent (about $16 billion) of long-term care expenditures in
            2003.
    ---------------------------------------------------------------------------
        \7\ Private long-term care insurance commonly includes policies
    that provide coverage for at least 12 months of necessary services--as
    demonstrated by an inability to perform a certain number of activities
    of daily living--provided in settings other than acute-care hospital
    units.
    ---------------------------------------------------------------------------
      ABSENT REFORM, SPENDING FOR MEDICAID, MEDICARE, AND SOCIAL SECURITY
             WILL PUT UNSUSTAINABLE PRESSURE ON THE FEDERAL BUDGET

        Before focusing on the increased burden that long-term care will
    place on federal and state budgets, it is important to look at the
    broader budgetary context. As we look ahead we face an unprecedented
    demographic challenge with the aging of the baby boom generation. As
    the share of the population 65 and over climbs, federal spending on the
    elderly will absorb a larger and ultimately unsustainable share of the
    federal budget and economic resources. Federal spending for Medicaid,
    Medicare, and Social Security is expected to surge--nearly doubling by
    2035--as people live longer and spend more time in retirement. In
    addition, advances in medical technology are likely to keep pushing up
    the cost of health care. Moreover, the baby boomers will be followed by
    relatively fewer workers to support them in retirement, prompting a
    relatively smaller employment base from which to finance these higher
    costs. Based on CBO's long-term Medicaid estimates, the federal share
    of Medicaid as a percent of GDP will grow from today's 1.5 percent to
    2.6 percent in 2035 and reach 4.8 percent in 2080. Under the 2005
    Medicare trustees' intermediate estimates, Medicare will almost triple
    as a share of gross domestic product (GDP) between now and 2035 (from
    2.7 percent to 7.5 percent) and reach 13.8 percent of GDP in 2080.
    Under the Social Security trustees' intermediate estimates, Social
    Security spending will grow as a share of GDP from 4.3 percent today to
    6.3 percent in 2035, reaching 6.4 percent in 2080. (See fig. 2.)
    Combined, in 2080 almost one-quarter of GDP will be devoted to federal
    spending for these three programs alone.
        To move into the future with no changes in federal health and
    retirement programs is to envision a very different role for the
    federal government. Our long-term budget simulations serve to
    illustrate the increasing constraints on federal budgetary flexibility
    that will be driven by entitlement spending growth. Assume, for
    example, that all expiring tax provisions are extended, revenue remains
    constant thereafter as a share of GDP, and discretionary spending keeps
    pace with the economy. Under these conditions, by 2040 federal revenues
    may be adequate to pay little more than interest on the federal
    debt.8 (See fig. 3.)
    ---------------------------------------------------------------------------
        \8\ For additional discussion of our budget simulations, see GAO,
    Our Nation's Fiscal Outlook: The Federal Government's Long-Term Budget
    Imbalance, at http://www.gao.gov/special.pubs/longterm/longterm.html.
    ---------------------------------------------------------------------------
        Beginning about 2010, the share of the population that is age 65 or
    older will begin to climb, with profound implications for our society,
    our economy, and the financial condition of these entitlement programs.
    In particular, both Social Security and the Hospital Insurance portion
    of Medicare are largely financed as pay-as-you-go systems in which
    current workers' payroll taxes pay current retirees' benefits.
    Therefore, these programs are directly affected by the relative size of
    populations of covered workers and beneficiaries. Historically, this
    relationship has been favorable. In the near future, however, the
    overall worker-to-retiree ratio will change in ways that threaten the
    financial solvency and sustainability of these entitlement programs. In
    2000, there were 4.8 working-age persons (20 to 64 years) per elderly
    person, but by 2030, this ratio is projected to decline to
    2.9.9 This decline in the overall worker-to-retiree ratio
    will be due to both the surge in retirees brought about by the aging
    baby boom generation as well as falling fertility rates, which
    translate into relatively fewer workers in the near future.
    ---------------------------------------------------------------------------
        \9\ The specific ratios for the programs differ because of
    differences in the respective covered populations. Specifically, for
    Social Security, the ratio of covered workers to beneficiaries in 2005
    is estimated to be 3.3. Under the 2005 Trustees' intermediate
    estimates, this ratio is projected to decline to 2.1 by 2035. For
    Medicare Hospital Insurance, the ratio was estimated to be 3.9 for 2005
    and was projected to decline to 2.3 by 2035 under the 2005 Trustees'
    intermediate estimates.
    ---------------------------------------------------------------------------
        Social Security's projected cost increases are due predominantly to
    the burgeoning retiree population. Even with the increase in the Social
    Security eligibility age to 67, these entitlement costs are anticipated
    to increase dramatically in the coming decades as a larger share of the
    population becomes eligible for Social Security, and if, as expected,
    average longevity increases.
        As the baby boom generation retires and the Medicare-eligible
    population swells, the imbalance between outlays and revenues will
    increase dramatically. Medicare growth rates reflect not only a rapidly
    increasing beneficiary population, but also the escalation of health
    care costs at rates well exceeding general rates of inflation. While
    advances in science and technology have greatly expanded the
    capabilities of medical science, disproportionate increases in the use
    of health services have been fueled by the lack of effective means to
    channel patients into consuming, and providers into offering, only
    appropriate services. In fiscal year 2004, Medicare spending grew by
    8.5 percent and is up 9.9 percent for the first 6 months of fiscal year
    2005.10 The implementation of the Medicare outpatient drug
    benefit in January 2006 will further increase Medicare spending in
    future years.
    ---------------------------------------------------------------------------
        \10\ See CBO, Monthly Budget Review for November 4, 2004, and April
    6, 2005.
    ---------------------------------------------------------------------------
        To obtain a more complete picture of the future health care
    entitlement burden, especially as it relates to long-term care, we must
    also acknowledge and discuss the important role of Medicaid. In 2003,
    approximately 69 percent of all Medicaid dollars was dedicated to
    services for the elderly and people with disabilities. Medicaid is the
    second largest and fastest growing item in overall state spending. At
    the February 2005 National Governors Association meeting, governors
    reported that states are faced with proposing cuts in their Medicaid
    programs. Over the longer term, the increase in the number of elderly
    will add considerably to the strain on federal and state budgets as
    governments struggle to finance increased Medicaid spending. In
    addition, this strain on state Medicaid budgets may be exacerbated by
    fluctuations in the business cycle. State revenues decline during
    economic downturns, while the needs of the disabled for assistance
    remain constant.

       BABY BOOM GENERATION WILL GREATLY EXPAND DEMAND FOR LONG-TERM CARE

        In coming decades, the sheer number of aging baby boomers will
    swell the number of elderly with disabilities and the need for
    services. These overwhelming numbers offset the slight reductions in
    the prevalence of disability among the elderly reported in recent
    years. In 2000, individuals aged 65 or older numbered 35.1 million
    people--12.4 percent of our nation's total population. By 2020, that
    percentage will increase by nearly one-third to 16.3 percent--one in
    six Americans--and will represent nearly 20 million more elderly than
    there were in 2000. By 2040, the number of elderly aged 85 years and
    older--the age group most likely to need long-term care services--is
    projected to increase more than 250 percent from 4.3 million in 2000 to
    15.4 million (see fig. 4).
        It is difficult to precisely predict the future increase in the
    number of the elderly with disabilities, given the counterbalancing
    trends of an increase in the total number of elderly and a possible
    continued decrease in the prevalence of disability. The number of
    elderly with disabilities remained fairly constant from 1982 through
    1999 while the percentage of those with disabilities fell between 1 and
    2 percent a year from 1984 through 1999. Possible factors contributing
    to this decreased prevalence of disability include improved health
    care, improved socioeconomic status, and better health behaviors. The
    positive benefits of the decreased prevalence of disability, however,
    will be overwhelmed by the sheer numbers of aged baby boomers. The
    total number of disabled elderly is projected to increase, with
    estimates varying from an increase of one-third to twice the current
    level, or as high as 12.1 million by 2040.
        The increased number of disabled elderly will exacerbate current
    problems in the provision and financing of long-term care services. For
    example, in 2000 it was reported that approximately one in five adults
    with long-term care needs and living in the community reported an
    inability to receive needed care, such as assistance in toileting or
    eating, often with adverse consequences.11 In addition,
    disabled elderly may lack family support or the financial means to
    purchase medical services. Long-term care costs can be financially
    catastrophic for families. Services, such as nursing home care, are
    very expensive; while costs can vary widely, a year in a nursing home
    typically costs more than $50,000, and in some locations can be
    considerably more. Because of financial constraints, many elderly rely
    heavily on unpaid caregivers, usually family members and friends;
    overall, the majority of care received in the community is unpaid.
    However, in coming decades, fewer elderly may have the option of unpaid
    care because a smaller proportion may have a spouse, adult child, or
    sibling to provide it. By 2020, the number of elderly who will be
    living alone with no living children or siblings is estimated to reach
    1.2 million, almost twice the number without family support in
    1990.12 In addition, geographic dispersion of families may
    further reduce the number of unpaid caregivers available to elderly
    baby boomers.
    ---------------------------------------------------------------------------
        \11\ Judith Feder et al., ``Long-Term Care in the United States: An
    Overview,'' Health Affairs, May/June 2000, pp. 40-56.
        \12\ ``Aging into the 21st Century,'' prepared by Jacob Siegel for
    the Administration on Aging, U.S. Department of Health and Human
    Services, May 1996.
    ---------------------------------------------------------------------------
    SPENDING FOR LONG-TERM CARE FOR ELDERLY ANTICIPATED TO INCREASE SHARPLY

        Public and private spending on long-term care was about $183
    billion for persons of all ages in 2003. CBO projected in 1999 that
    long-term care spending for the elderly could increase by more than
    two-and-a-half times from 2000 to 2040. A 2001 study projected that
    these expenditures could quadruple from 2000 through 2050, reaching
    $379 billion in 2050.13 (See fig. 5.) Estimates of future
    spending are imprecise, however, due to the uncertain effect of several
    important factors, including how many elderly will need assistance, the
    types of care they will use, and the availability of public and private
    sources of payment for care. Absent significant changes in the
    availability of public and private payment sources, however, future
    spending is expected to continue to rely heavily on public payers,
    particularly Medicaid, which estimates indicate paid about 35 percent
    of long-term care expenditures for the elderly in 2004.
    ---------------------------------------------------------------------------
        \13\ Assistant Secretary for Planning and Evaluation (ASPE) of the
    U.S. Department of Health and Human Services, who contracted with The
    Lewin Group, as published in Urban Institute, ``Long-Term Care:
    Consumers, Providers, and Financing, A Chart Book'' (Washington, D.C.:
    March 2001).
    ---------------------------------------------------------------------------
        One factor that will affect spending is how many elderly will need
    assistance. As noted earlier, even with continued decreases in the
    prevalence of disability, aging baby boomers are expected to have a
    disproportionate effect on the demand for long-term care. Another
    factor influencing projected long-term care spending is the type of
    care that the baby boom generation will use. Per capita expenditures
    for nursing home care greatly exceed those for care provided in other
    settings. Since the 1990s, there have been increases in the use of paid
    home care as well as in assisted living facilities, a relatively newer
    and developing type of housing. It is unclear what effect continued
    growth in paid home care, assisted living facilities, or other care
    alternatives may have on future expenditures. Any increase in the
    availability of home care may reduce the average cost per disabled
    person, but the effect could be offset if there is an increase in the
    use of paid home care by persons currently not receiving these
    services.
        Changes in the availability of public and private sources to pay
    for care will also affect expenditures. Private long-term care
    insurance has been viewed as a possible means of reducing catastrophic
    financial risk for the elderly needing long-term care and relieving
    some of the financial burden currently falling on public long-term care
    programs. Increases in private insurance may lower public expenditures
    but raise spending overall because insurance increases individuals'
    financial resources when they become disabled and allows the purchase
    of additional services. The number of policies in force remains
    relatively small despite improvements in policy offerings and the tax
    deductibility of premiums. However, as we have previously testified,
    questions about the affordability of long-term care policies and the
    value of the coverage relative to the premiums charged have posed
    barriers to more widespread purchase of these policies.14
    Further, many baby boomers continue to assume they will never need such
    coverage or mistakenly believe that Medicare or their own private
    health insurance will provide comprehensive coverage for the services
    they need. If private long-term care insurance is expected to play a
    larger role in financing future generations' long-term care needs,
    consumers need to be better informed about the costs of long-term care,
    the likelihood that they may need these services, and the limits of
    coverage through public programs and private health insurance.
    ---------------------------------------------------------------------------
        \14\ GAO, Long-Term Care: Baby Boom Generation Increases Challenge
    of Financing Needed Services, GAO01563T (Washington, D.C.: Mar. 27,
    2001) and Long-Term Care Insurance: Better Information Critical to
    Prospective Purchasers, GAO/THEHS00196 (Washington, D.C.: Sept. 13,
    2000).
    ---------------------------------------------------------------------------
        With or without increases in the availability of private insurance,
    Medicaid and Medicare are expected to continue to pay for the majority
    of long-term care services for the elderly in the future. Without
    fundamental financing changes, Medicaid can be expected to remain one
    of the largest funding sources for long-term care services for aging
    baby boomers, with Medicaid expenditures for long-term care for the
    elderly reaching as high as $132 billion by 2050. As noted earlier,
    this increasing burden will strain both federal and state governments.

             CONSIDERATIONS FOR REFORMING LONG-TERM CARE FINANCING

        Given the anticipated increase in demand for long-term care
    services resulting from the aging of the baby boom generation, the
    concerns about the availability of services, and the expected further
    stress on federal and state budgets and individuals' financial
    resources, some policymakers and advocates have called for long-term
    care financing reforms. Indeed, we identified options for rethinking
    the federal, state, and private insurance roles in financing long-term
    care as one of the key questions that our nation needs to face as it
    addresses 21st century challenges.15 The Comptroller General
    previously testified in 2002 on several considerations for policymakers
    to keep in mind when considering reforms for long-term care financing,
    and these considerations remain relevant today.
    ---------------------------------------------------------------------------
        \15\ GAO, 21st Century Challenges: Reexamining the Base of the
    Federal Government.
    ---------------------------------------------------------------------------
        At the outset, it is important to recognize that long-term care
    services are not just another set of traditional health care services.
    Meeting acute and chronic health care needs is an important element of
    caring for aging and disabled individuals. Long-term care, however,
    encompasses services related to maintaining quality of life, preserving
    individual dignity, and satisfying preferences in lifestyle for someone
    with a disability severe enough to require the assistance of others in
    everyday activities. Some long-term care services are akin to other
    health care services, such as personal assistance with activities of
    daily living or monitoring or supervision to cope with the effect of
    dementia. Other aspects of long-term care, such as housing, nutrition,
    and transportation are services that all of us consume daily but become
    an integral part of long-term care for a person with a disability.
    Disabilities can affect housing needs, nutritional needs, or
    transportation needs. But, what is more important is that where one
    wants to live or what activities one wants to pursue also affects how
    needed services can be provided. Providing personal assistance in a
    congregate setting such as a nursing home or assisted living facility
    may satisfy more of an individual's needs, be more efficient, and
    involve more direct supervision to ensure better quality than when
    caregivers travel to individuals' homes to serve them one on one. Yet,
    those options may conflict with a person's preference to live at home
    and maintain autonomy in determining his or her daily activities.
        Keeping in mind that policies need to take account of the
    differences involved in long-term care, there are several issues that
    policymakers may wish to consider as they address long-term care
    financing reforms. These include:

     Determining societal responsibilities. A fundamental question is how
            much the choices of how long-term care needs are met should
            depend upon an individual's own resources or whether society
            should supplement those resources to broaden the range of
            choices. For a person without a disability requiring long-term
            care, where to live and what activities to pursue are lifestyle
            choices based on individual preferences and resources. However,
            for someone with a disability, those lifestyle choices affect
            the costs of long-term care services. The individual's own
            resources--including financial resources and the availability
            of family or other informal supports--may not be sufficient to
            preserve some of their choices and also obtain needed long-term
            care services.
          Societal responsibilities may include maintaining a safety net to
            meet individual needs for assistance. However, the safety net
            may not provide a full range of choices in how those needs are
            met. Persons who require assistance multiple times a day and
            lack family members to provide some share of this assistance
            may not be able to have their needs met in their own homes. The
            costs of meeting such extensive needs may mean that sufficient
            public support is available only in settings such as assisted
            living facilities or nursing homes. More extensive public
            support may be extended, but decisions to do so should
            carefully consider affordability in the context of competing
            demands for our nation's resources.
     Considering the potential role of social insurance in financing.
            Government's role in many situations has extended beyond
            providing a safety net. Sometimes this extended government role
            has been a result of efficiencies in having government
            undertake a function, or in other cases this role has been a
            policy choice. Some proposals have recommended either voluntary
            or mandatory social insurance to provide long-term care
            assistance to broad groups of beneficiaries. In evaluating such
            proposals, careful attention needs to be paid to the
            limitations and conditions under which services will be
            provided. In addition, who will be eligible and how such a
            program will be financed are critical choices. As in
            establishing a safety net, it is imperative that any option
            under consideration be thoroughly assessed for its
            affordability over the longer term.
     Encouraging personal preparedness. Becoming disabled is a risk. Not
            everyone will experience disability during his or her lifetime
            and even fewer persons will experience a severe disability
            requiring extensive assistance. This is the classic situation
            in which having insurance to provide additional resources to
            deal with a possible disability may be better than relying on
            personally saving for an event that may never occur. Insurance
            allows both persons who eventually will become disabled and
            those who will not to use more of their economic resources
            during their lifetime and to avoid having to put those
            resources aside for the possibility that they may become
            disabled.
          The public sector has at least two important potential roles in
            encouraging personal preparedness. One is to adequately educate
            people about the current divisions between personal and
            societal responsibilities. Only if the limits of public support
            are clear will individuals be likely to take steps to prepare
            for a possible disability. Currently, one of the factors
            contributing to the lack of preparation for long-term care
            among the elderly is a widespread misunderstanding about what
            services Medicare will cover. Another public sector role may be
            to assure the availability of sound private long-term care
            insurance policies and possibly to create incentives for their
            purchase. Progress has been made in improving the value of
            insurance policies through state insurance regulation and
            through strengthening the requirements for policies qualifying
            for favorable tax treatment enacted by the Health Insurance
            Portability and Accountability Act of 1996.16
            Furthermore, since 2002 the federal government has offered
            long-term care insurance to federal employees, military
            personnel, retirees, and their families, providing the largest
            offering of long-term care insurance. While the federal
            government's program is still very new, other employers and
            policymakers will likely be carefully watching the federal
            government's experience in offering long-term care insurance.
            Long-term care insurance remains an evolving product, and given
            the flux in how long-term care services are delivered, it is
            important to monitor whether long-term care insurance
            regulations need adjustments to ensure that consumers receive
            fair value for their premium dollars.
    ---------------------------------------------------------------------------
        \16\ Pub. L. No. 104-191, 321-327, 110 Stat. 1936, 2054-2067.
    ---------------------------------------------------------------------------
     Recognizing the benefits, burdens, and costs of informal caregiving.
            Family and other informal caregivers play a critical role in
            supplying the bulk of long-term care to disabled persons.
            Effective policy must create incentives and supports for
            enabling informal caregivers to continue providing assistance.
            Further, care should be taken to avoid creating incentives that
            result in informal care being inappropriately supplanted by
            formal paid services. At the same time, it is important to
            recognize the physical, emotional, and social burdens that
            providing care impose on the caregiver and its economic costs
            to the caregiver and to society. Caregiving may create needs in
            caregivers themselves that require respite or other relief
            services. In addition, caregiving can conflict with caregivers'
            employment, creating economic losses for caregivers and
            society. Such losses in productivity will become even more
            important in the coming decades as the proportion of the
            population that is working-age declines.
     Assessing the balance of federal and state responsibilities to ensure
            adequate and equitable satisfaction of needs. Reforms in long-
            term care financing may require reevaluating the traditional
            federal and state financing roles to better ensure an equitable
            distribution of public support for individuals with
            disabilities. The variation across states in Medicaid spending
            per capita on long-term care is in part reflective of
            differences among states in generosity of services as well as
            their fiscal capacity. Given these differences, having states
            assume primary responsibility for financing long-term care
            subjects individuals to different levels of support depending
            on where they live. In addition, because state revenues are
            sensitive to the business cycle and states generally must have
            balanced budgets, their services become vulnerable during
            economic downturns.
     Adopting effective and efficient implementation and administration of
            reforms. Proposed reforms to better meet the increasing demand
            for long-term care within budget constraints will be successful
            only if they are administratively feasible, effectively reach
            targeted populations and unmet needs, and efficiently provide
            needed services at minimum cost while complementing already
            available services and financing sources.
     Developing financially sustainable public commitments. Finally, as
            noted earlier, absent reform, existing federal entitlement
            commitments for Medicaid, Medicare, and Social Security will
            represent an increasing and potentially unsustainable share of
            the economy. States, too, are concerned about their budgetary
            commitments for long-term care through their share of the
            Medicaid program. Before committing to any additional public
            role in financing long-term care, it is imperative to provide
            reasonable assurance that revenues will be available to fund
            its future costs.
        Mr. Chairman, this completes my prepared statement. I would be
    happy to respond to any questions you or other members of the
    subcommittee may have at this time.

                          CONTACT AND ACKNOWLEDGMENTS

        For future contacts regarding this testimony, please call Kathryn
    G. Allen at (202) 512-7118. Other individuals who made key
    contributions include John Dicken, Linda F. Baker, Laura Sutton
    Elsberg, James R. McTigue, and Joseph Petko.

    [GRAPHIC] [TIFF OMITTED] T0749.005

    [GRAPHIC] [TIFF OMITTED] T0749.006

    [GRAPHIC] [TIFF OMITTED] T0749.007

        Mr. Deal. Thank you. Ms. O'Shaughnessy.

                    STATEMENT OF CAROL O'SHAUGHNESSY

        Ms. O'Shaughnessy. Thank you, Mr. Chairman and Mr. Brown,
    for the opportunity to testify today. I would like to summarize
    my written comments, which contain information about the
    characteristics of the long-term care population, and public
    and private spending.
        The first point I would like to make is that the need for
    long-term care affects people of all ages, children who are
    born with disabling conditions, such as mental retardation or
    cerebral palsy, working age adults with inherited or acquired
    disabling conditions, and the elderly, who have chronic
    conditions. About 56 percent of all people receiving care are
    elderly, and the remainder are people who are younger. But 6 to
    8 million persons have significant disabilities. That is, they
    have at least one limitation in an activity of daily living.
    There are many more who have other, less serious limitations.
    The vast majority of adults, regardless of age, over 80
    percent, receive care in home and community-based settings.
        People enter a nursing home only as a last resort, due to
    significant disabilities, or they need 24 hour supervision
    for--due to a cognitive disability, such as Alzheimer's
    disease, and they have fragile or non-existing family support
    systems. I would just like to point out that about half of
    people who are living in the community with long-term care
    needs have very significant disabilities with three or more
    limitations in activities of daily living.
        As we talked about today, in terms of public and private
    spending, the amount was $182 billion in 2003, despite the
    significant spending, the Nation lacks a comprehensive policy
    on long-term care. Of total public spending, that is $123
    billion, 68 percent is from public sources, yet most care
    received by persons with disabilities comes from informal,
    unpaid supports. Assisting families to prepare for the
    potentially catastrophic costs of long-term care is viewed by
    many, as we have heard today, as an important component of
    family financial security.
        Coverage of institutional care, largely under Medicaid, has
    defined Federal policy for decades. However, in 1999, Supreme
    Court decision Olmstead has sharpened Federal and State policy
    attention on home and community-based services. The Court held
    that institutionalization of persons who could live in
    community settings violates the Americans with Disabilities
    Act, and many States are faced with many Olmstead suits in
    their jurisdictions.
        The last time Congress made a systemic change in Federal
    long-term care policy was in 1981, with the creation of the
    Medicaid home and community-based waiver program that we have
    heard a lot about today. The last time Congress comprehensively
    reviewed long-term care was in 1990, with the Pepper
    Commission. Despite enormous Federal and--research and
    demonstration activities to inform Federal policy, Congress has
    not reached consensus about where to go.
        As we have heard today, Medicaid by default is the Nation's
    primary source of public financing. One-third of all Medicaid
    funding goes to long-term care. About 67 percent of this was
    for institutional care, and 33 percent for home and community-
    based services. I would just like to point out with the 67
    percent, we have, of that proportion, we have about $44 million
    going to nursing homes, but $11 billion going to intermediate
    care facilities for the mentally retarded.
        From 1990 to 2003, Medicaid long-term care expenditures
    grew at an annual rate of about 8 percent, compared to an
    average rate of growth for all Medicaid spending of 10 percent.
    Over the last 15 years, Medicaid spending on long-term care has
    changed in composition, with a greater proportion going to home
    and community-based services, and a lower proportion for
    institutions. In 1990, 87 percent of Medicaid spending was on
    institutional care. In 2003, as I said, it is at 67 percent.
        These home and community-based service waiver programs have
    grown significantly, and States have made financial commitments
    to them in order to respond to consumer preferences. However,
    despite this growth, many States have waiting lists for home
    and community-based services programs, and I would also like to
    point out that of the $18 or so billion, $18 to $20 billion for
    the home and community-based waivers, three quarters of that
    money goes for persons with mental retardation. About one-third
    of the recipients, we heard about a million recipients, we can
    figure that about one third of the recipients for home and
    community-based services, based on a somewhat smaller number,
    are aged persons.
        For the past two decades, the principle debate in reform
    has been on the respective roles of the public and private
    sectors. On the one hand, proposals have been advanced for new
    social insurance programs, in order to provide individuals a
    minimum floor protection against the catastrophic costs.
    Alternatively, we have heard a lot about private sector
    financing, such as insurance, based on the rationale that the
    Nation can't afford an additional tax burden. While some
    policymakers are concerned about new social insurance programs,
    others are concerned about the affordability of private, long-
    term care solutions, or insurance by moderate and low income
    individuals. Because of the diverse socioeconomic and
    disability characteristics of the population in need, one
    approach to financing reform may not fit all people. Defining
    the public and private roles for the diverse groups may need to
    account for their varying abilities and financial capabilities.
        Other subsidiary issues we have heard a lot about today
    would be how to create more incentives for home and community-
    based services and assist family caregivers, and encourage
    individuals and families to prepare for the potentially
    catastrophic costs. CRS is currently working on a report that
    would explore many of these options, and we would be glad to
    talk to you about that later.
        Thank you.
        [The prepared statement of Carol O'Shaughnessy follows:]

     Prepared Statement of Carol O'Shaughnessy,1 Specialist in
               Social Legislation, Congressional Research Service
    ---------------------------------------------------------------------------
        \1\ This testimony includes key contributions from Bob Lyke,
    Specialist in Social Legislation, Diane Justice, Specialist in
    Gerontology, Laura Shrestha, Specialist in Demography, Specialist in
    Social Legislation, and Julie Stone and Karen Tritz, Analysts in Social
    Legislation. Technical support was provided by Barbara Sanders and
    Charles Dibble, CRS.
    ---------------------------------------------------------------------------
        Good morning, Mr. Chairman and Members of the Committee. My name is
    Carol O'Shaughnessy. I am a Specialist in Social Legislation at the
    Congressional Research Service. I am pleased to present testimony this
    morning. My testimony summarizes key characteristics about people who
    receive long-term care services, services they receive, and the role of
    public programs in financing these services.
    Summary
        Long-term care support refers to a range of health and social
    services needed by persons who lack the capacity for self-care due to
    physical, cognitive, or mental illnesses that result in functional
    impairment and dependence on others for an extended period of time.
    Long-term care services include care in nursing homes and other
    institutions, as well as in home and community settings. The need for
    long-term care is measured by a person's inability to carry out basic
    human functions, or activities of daily living (ADLs), such as bathing,
    dressing, eating, toileting, transferring from a bed to a chair, and
    getting around inside the home. 22 It is also measured in
    terms of people needing supervision with performing ADLs when they have
    cognitive impairments, such as dementia. The extent of care needed
    varies depending upon a person's degree of impairment.
    ---------------------------------------------------------------------------
        \2\ Other measures include a person's need for assistance with meal
    preparation, and light housework, among other things, known as
    instrumental activities of daily living (IADLs).
    ---------------------------------------------------------------------------
         The need for long-term care affects persons of all ages--children
    who are born with disabling conditions, such as mental retardation, or
    cerebral palsy; working age adults with inherited or acquired disabling
    conditions; and the elderly who have chronic conditions or illnesses.
    While the likelihood of needing long-term care assistance occurs more
    frequently in older ages, advances in medical care are enabling persons
    of all ages with disabilities to live longer. Of all persons receiving
    assistance with at least one ADL and who reside at home or in nursing
    homes, about 56% are persons over age 65, and 44% are under age 65.
         In 2003, total public and private spending on long-term care was
    $182 billion. Despite this significant spending, the nation lacks a
    comprehensive policy on long-term care. While multiple public programs
    provide assistance, no one program is designed to support the full
    range of long-term care services and supports.
         Of total pubic and private spending, $123 billion, or 68%, is
    from public sources. Yet, most care received by people with
    disabilities is provided by unpaid, informal sources--family and
    friends. The aging of society will exacerbate demand on family
    caregivers. Assisting families to prepare for potentially catastrophic
    costs of long-term care is viewed by many as an important component of
    family financial security.
         Coverage of institutional care, largely under Medicaid, has
    defined federal long-term care policy for decades. However, a 1999
    Supreme Court decision--Olmstead v. L.C.--has sharpened federal and
    state policy attention on home and community-based services. The Court
    held that, under certain circumstances, institutionalization of persons
    who could live in community settings, violates the Americans with
    Disabilities Act (ADA).
         Despite enormous federal research and demonstration activities
    designed to inform federal long-term care policy over the last several
    decades, Congress has not reached consensus on what road to take. The
    complexity of financing and delivering long-term care to diverse groups
    of persons with disabilities in a variety of settings through multiple
    federal programs has been a challenge to federal and state governments.
         The last time Congress made a systemic change in federal long-
    term care policy was in 1981 when it created the Medicaid Section
    1915(c) home and community-based services waiver program for persons
    who would otherwise require care in institutions. The last time
    Congress comprehensively reviewed policy options for long-term care
    reform was in 1990 under the U.S. Bipartisan Commission on
    Comprehensive Health Care (known as the Pepper Commission). Other
    changes have included changes in Medicaid eligibility rules for long-
    term care services when, in 1988, Congress provided financial
    protections for spouses of persons needing nursing home care and other
    Medicaid services, and again in 1993, when Congress tightened rules on
    transfer of assets. In 2000, Congress recognized the needs of
    caregivers by authorizing a caregiver support program under the Older
    Americans Act.
         At the center of the debate on long-term care financing is the
    Medicaid program. Medicaid, by default, has become the nation's primary
    source of public financing for people who need long-term care support.
    One-third of total Medicaid spending in FY2003 was devoted to long-term
    care--$84 billion with about 67% for institutional care and 33% for
    home and community-based services. From 1990 through 2003, Medicaid
    long-term care expenditures grew at an annual average rate of 8% per
    year. Over the last 15 years, Medicaid long-term care spending has
    experienced a change in composition with a greater proportion of
    spending devoted to home and community-based services and a lower
    proportion for institutional care for persons with mental retardation
    and developmental disabilities.
         A number of themes of reform have been advanced over the last
    several decades. The principal debate in financing long-term care has
    focused on the respective roles of the public and private sectors.
    Because of the diverse socio-economic and disability characteristics of
    the population in need, one approach to financing reform may not fit
    all people. Defining the public and private sector roles in financing
    long-term care for these diverse groups may need to account for their
    varying needs and financial abilities.
        A broad spectrum of proposals have been advanced over the years to
    change the way long-term care services are financed, ranging from
    social insurance programs to private sector approaches. While some
    policymakers are concerned about the cost of new social insurance
    programs, others are concerned about the affordability of certain
    private sector solutions, such as long-term care insurance, by moderate
    and low income persons.
        Other subsidiary issues in the reform debate have included
    proposals to address the costs and quality of care; create more
    incentives for home and community-based care; assist family caregivers;
    and encourage individuals and families to plan for the potentially
    catastrophic costs of care. CRS is currently preparing a report
    summarizing a broad range of options that Congress might consider in
    revising the nation's long-term care system.

               LONG-TERM CARE: CONSUMERS, PROVIDERS, AND SPENDING

    The Long-Term Care Population
        Long-term care support refers to a range of health and social
    services needed by persons who lack the capacity for self-care due to
    physical, cognitive, or mental illnesses that result in functional
    impairment and dependence on others for an extended period of time.
    Long-term care services include care in nursing homes and other
    institutions, as well as in home and community settings. The need for
    long-term care is measured by a person's inability to carry out basic
    human functions, or activities of daily living (ADLs), such as bathing,
    dressing, eating, toileting, transferring from a bed to a chair, and
    getting around inside the home. Other measures include a person's need
    for assistance to live independently in the community, such as
    shopping, meal preparation, and light housework, known as instrumental
    activities of daily living (IADLs). It is also measured in terms of
    people needing supervision with performing ADLs or IADLs when they have
    cognitive impairments, such as dementia. The amount of care needed
    varies depending upon a person's degree of impairment.
        The need for long-term care affects persons with disabilities of
    all ages--children who are born with disabling conditions, such as
    mental retardation, or cerebral palsy, and remain disabled the rest of
    their lives; working age adults with inherited or acquired disabling
    conditions; and finally, persons aged 65 and older who have chronic
    conditions or illnesses. While the likelihood of needing long-term care
    assistance occurs more frequently in older ages, advances in medical
    care are enabling persons of all ages with disabilities to live longer.
        Estimates of the number of persons of all ages who receive long-
    term care, need assistance with one or more ADLs, and reside at home or
    in facilities, range from 6.2 million to 8.0 million
    persons.3 Estimates would be higher if persons who receive
    assistance with IADLs only are included.4 Of all persons
    receiving assistance with at least one ADL and who reside at home or in
    nursing homes, about 56% are persons over age 65, and 44% are under age
    65.5
    ---------------------------------------------------------------------------
        \3\ This range is drawn from a variety of sources: the National
    Nursing Home Survey (1999); the Survey of Income and Program
    Participation (1997); the National Long-Term Care Survey (1999); the
    National Health Interview Survey (2002); and the National Medical
    Expenditure Survey (1996).
        \4\ Estimates of the number of persons who receive long-term care
    vary depending upon the numbers and types of ADL and IADL limitations,
    whether the person receives human assistance, standby help from another
    person, and other factors used for measurement.
        \5\ CRS estimates based on data from the National Health Interview
    Survey (NHIS) 2002, and the National Nursing Home Survey (NNHS), 1999.
    ---------------------------------------------------------------------------
        The vast majority of adults, regardless of age--over 80%--receive
    care in home and community settings, not in nursing homes or other
    institutions. About 1.8 million adults--less than 20% of all adults
    receiving assistance--reside in institutions. Only the very old--
    persons aged 95 and older--have about an equal chance of being cared
    for in an institution or in the community (Table 1).

                       Table 1. Persons Aged 65 and Older Receiving Long-Term Care Services, 1999
                                                (population in thousands)
    ----------------------------------------------------------------------------------------------------------------
                                                                          Percent     % Receiving
                                                         Persons aged    receiving     long-term    % Receiving long-
                         Age range                        65 or older    long-term    care in the     term care in
                                                                         care \1\    community \2\  institutions \3\
    ----------------------------------------------------------------------------------------------------------------
    Total, persons age 65 or older.....................        34,459         5,479          3,824           1,654
                                                                              15.9%          11.1%            4.8%
    Age
    65-69..............................................         9,443          5.7%           5.0%            0.7%
    70-74..............................................         8,785          8.8%           7.2%            1.7%
    75-79..............................................         7,305         13.6%          10.1%            3.5%
    80-84..............................................         4,797         24.8%          17.3%            7.4%
    85-89..............................................         2,601         39.8%          24.8%           15.0%
    90-94..............................................         1,133         59.8%          33.7%           26.1%
    95 years and older.................................         0,396         72.1%          35.7%           36.4%
    ----------------------------------------------------------------------------------------------------------------
    Source: Unpublished tabulations of the 1999 National Long-Term Care Survey by Brenda C. Spillman. The Urban
      Institute, 2003.
    \1\ Receipt of long-term care is defined as receiving human assistance or standby help with at least one of six
      ADLs or being unable to perform at least one of eight IADLs without help.
    \2\ This does not include about 1.3 million persons with disabilities who use special equipment to manage their
      disabilities, but do not receive human assistance.
    \3\ This includes about 1.5 million persons in nursing homes and slightly more than 150,000 persons in other
      care facilities.

        People residing in institutions have more limitations than people
    residing at home. However, people receiving long-term care services at
    home are also highly impaired. Of the 1.6 million people residing in
    nursing homes with at least one ADL, about 91% were severely impaired
    with three or more limitations in ADLs (1999). Of 4.2 million persons
    receiving assistance at home, about 53% had limitations in three or
    more ADLs (2002). (Figures 1 and 2.)
    Providers of Long-Term Care
        The primary source of long-term care assistance is informal
    caregivers--families and friends of people with disabilities who
    provide assistance without compensation. Two-thirds of the functionally
    impaired elderly receiving care for impairments with ADLs or IADLs, and
    about 71% of such persons age 18-64, rely exclusively on informal,
    unpaid assistance (Table 2).

    Table 2. Type of Care Received by Persons Aged 18 and Over Living in the
                                    Community
    ------------------------------------------------------------------------
      Persons receiving long-term care     Persons age 65    Persons age 18-
         assistance in the community          and older            64
    ------------------------------------------------------------------------
    Total...............................       3.7 million       3.4 million
    Percent receiving care from unpaid                 66%               71%
     providers only.....................
    Percent receiving paid care only....                9%                6%
    Percent receiving unpaid and paid                  26%                6%
     care...............................
    Unknown.............................    Not applicable               18%
    ------------------------------------------------------------------------
    Source: For persons aged 65 and older. National Long-Term Care Survey,
      1999; estimates prepared by Brenda Spillman of the Urban Institute
      cited in Older Americans 2004, Key Indicators of Well-Being, Federal
      Interagency Forum on Aging Related Statistics, 2004. For persons 18-
      64, 1994 National Health Interview Survey, Disability Supplement.
      William Spector, et al., Characteristics of Long-Term Care Users,
      Prepared for the Institute of Medicine, 1998. Note: These estimates
      include persons with limitations in IADLs.

        Estimates of the number of caregivers can range from 10-13 million
    people caring for people with moderate or severe disabilities, and can
    be many millions more, depending upon the characteristics of the
    population served and the amount and intensity of care provided.
    Research has shown that while adults of all ages provide long-term care
    assistance, people in middle to late middle age are most likely to be
    caregivers. While women are most likely to be caregivers, both men and
    women provide care. In addition, caregivers often have competing
    demands--about one-half are employed and one-third have minor children
    in the home.66
    ---------------------------------------------------------------------------
        \6\ Administration on Aging, National Family Caregiver Resource
    Guide, Prepared by The Lewin Group, Inc., Washington, D.C., Aug. 2002.
    ---------------------------------------------------------------------------
        The aging of society will exacerbate demands on family caregivers
    for people with disabilities of all ages, not only for the elderly.
    Family caregivers are also vital for people with developmental
    disabilities. About 60% of the 4.6 million people with mental
    retardation or developmental disabilities receive care from family
    caregivers; of these people, more than one in six were living with
    caregivers over the age of 60. Many people with developmental
    disabilities are living longer with medical advances and supportive
    care. Some observers have pointed to a likelihood that people with
    developmental disabilities could live into their own retirement and
    outlive their family caregivers.7
    ---------------------------------------------------------------------------
        \7\ David Braddock, Richard Hemp and Mary Rizzolo, State of the
    States in Developmental Disabilities: 2004. Mental Retardation, vol.
    42, no. 5, pp. 356-370 and Mary C. Rizzolo, et al., The State of the
    State in Developmental Disabilities, 2004. In the 1970s, the mean age
    of death for people with mental retardation was 56 years; in 1993, it
    was 66 years.
    ---------------------------------------------------------------------------
        In addition to the enormous amount of informal care provided by
    families and friends, the long-term care services system includes
    thousands of formal care providers. They range from institutional
    providers, including nursing homes and residential care facilities for
    people with mental retardation and developmental disabilities, to a
    variety of agencies and programs that provide a wide array of home and
    community-based services. These services include home health care,
    personal care, homemaker and chore assistance, adult day care services,
    home-delivered meals, transportation, and many others. In addition,
    assisted living facilities, adult foster care homes and other group
    homes provide both room and board as well as personal care and other
    assistance to people who have lost the capacity to live independently
    in their own homes.
        Utilization and supply of the various formal care providers is of
    concern to policymakers because these factors affect both cost and
    quality of care. The supply of nursing home beds varies widely among
    states as do the numbers and types of home and community-based
    providers. The average number of nursing home beds in the U.S. is 49
    beds per 1,000 people aged 65 and older; but the number of beds per
    state ranges from 73 beds per 1,000 elderly people in Louisiana to 21
    beds in Nevada. Similarly, the range in supply of personal and home
    care aides varies widely, from 45 aides per 1,000 elderly people in
    Texas to three aides per 1,000 elderly people in Mississippi, with a
    national average of 14 aides per 1,000 elderly people. 8
    ---------------------------------------------------------------------------
        \8\ Mary Jo Gibson et al., AARP, Across the States, Profiles of
    Long-Term Care, 2004.
    ---------------------------------------------------------------------------
        Researchers predict that the increased numbers of people reaching
    age 65 as well as their increasing longevity will affect future demand
    for formal providers. One study predicts that 44% of those people who
    turned age 65 in 2000, will enter a nursing home during their remaining
    lifetimes. Almost one-third will have nursing home stays of three
    months or longer, and almost one-fourth will have stays of one year or
    longer. This same study predicts that the number of people age 65 years
    old who will have any nursing home use will more than double from 2000
    to 2020 (from 891,000 to 1.8 million people) (Table 3). Policymakers
    may want to assess the utilization and supply issues affecting nursing
    facilities to determine whether other care modalities, such as greater
    supply of home care, assisted living and other residential care
    settings, may substitute for nursing home care for some people.

                          Table 3. Probability of Nursing Home Use at Age 65 for Various Years
    ----------------------------------------------------------------------------------------------------------------
                                                            Persons turning     Persons turning     Persons turning
                                                            age 65 in 2000      age 65 in 2010      age 65 in 2020
                Category of nursing home use             -----------------------------------------------------------
                                                             Number              Number              Number
                                                          (thousands)    %    (thousands)    %    (thousands)    %
    ----------------------------------------------------------------------------------------------------------------
    Category of use.....................................        2,013               2,625               3,922
    Any use.............................................          891     44        1,185     45        1,807     46
    Three months or longer..............................          651     32          873     33        1,344     34
    One year or longer..................................          469     23          632     24          977     25
    Five years or longer................................          169      8          232      9          363      9
    Timing of use
    Use in last year of life............................          793     39        1,057     40        1,618     41
    Use only prior to last year of life.................           98      5          127      5          190      5
    ----------------------------------------------------------------------------------------------------------------
    Source: Brenda C. Spillway and James Lubitz, ``New Estimates of Lifetime Nursing Home Use: Have Patterns
      Changed?'' Medical Care, vol. 40, no. 10, 2002.

        Cost of Care. The cost of long-term care is related to the type,
    intensity, and duration of services needed by individuals, as well as
    the availability of informal assistance from family and friends. At one
    end of the spectrum, costs for 24-hour care in nursing homes can range
    from $60,000-$70,000 per year,9 and even higher in
    institutions for persons with developmental disabilities where costs
    can exceed $100,000 per person. At the other end, the cost of providing
    home-delivered meals to a frail older person living at home may be
    quite modest.
    ---------------------------------------------------------------------------
        \9\ The MetLife Market Survey of Nursing Home and Home Care Costs,
    Sept. 2004. The average yearly rate for a private room in a nursing
    home was $70,080 and for a semi-private room was $61,685.
    ---------------------------------------------------------------------------
        Researchers and policymakers have long debated whether expanded
    access to home and community-based care for the nation's long-term care
    population is less costly than institutional care. This question is
    very complex and many factors must be considered, including how best to
    target home and community-based services and serve only those who would
    have entered a nursing home without the availability of expanded home
    care; what is the most effective mix of services to divert persons from
    institutional care; and how to assist informal caregivers who often
    make a difference in keeping their family members from entering an
    institution.
    Long-Term Care Spending
        A variety of public and private sources finance long-term care.
    Many federal programs assist persons needing long-term care services,
    either directly or indirectly through a range of health and social
    services, through cash assistance, and through tax benefits. While
    Medicaid is the primary source of public financing for long-term care,
    other programs, including Medicare, and social service programs, such
    as the Older Americans Act, provide assistance to persons who need
    long-term supports. No one program, however, is designed to support the
    full range of long-term care services needed by people with
    disabilities of all ages. Eligibility requirements, benefits, and
    reimbursement policies differ among major programs.
        Of the $1.44 trillion spent on all U.S. personal health care
    services in 2003, $181.9 billion, or about 12.6%, was spent on long-
    term care (Figure 3). This amount includes spending on services in
    institutions (nursing homes and intermediate care facilities for
    individuals with mental retardation (ICFs/MR)), and a wide range of
    home and community-based services, such as home health care services,
    personal care services, and adult day care, among others. Figure 3
    (below) does not take into account the economic value of care provided
    to individuals with long-term care needs by uncompensated informal care
    providers.
        Most public long-term care spending comes from the Medicaid program
    (a means-tested program jointly funded by federal and state
    governments). In CY2003, Medicaid spending accounted for 47.4% of all
    long-term care spending, or $86.3 billion. After Medicaid, private out-
    of-pocket spending is the next highest source of financing for long-
    term care, accounting for 20.6% of all long-term care spending, or
    $37.5 billion. Medicare plays a somewhat smaller role accounting for
    17.8%, or $32.4 billion, of the total. Private insurance accounts for
    about 8.7% of spending, or $15.7 billion.
                       medicaid's role in long-term care
        At the center of the debate on long-term care financing is the
    Medicaid program. Medicaid, by default, has become the nation's primary
    source of public financing for persons who need long-term care support.
    Medicaid coverage of long-term care is intended to serve as a safety
    net for persons who cannot afford the cost of institutional care or
    home and community-based services. People turn to Medicaid when they
    have no more than $2,000 in countable assets (excluding the person's
    home and certain other exempted assets). Generally, if they are not
    eligible for cash assistance under the Supplemental Security Income
    (SSI) program, they must apply most of their income to the cost of
    their care.
        Financing of institutional care has dominated Medicaid long-term
    care spending for decades. However, in recent years, state Medicaid
    programs have played an increasingly larger role in financing home and
    community-based services.
        Nursing Homes. In 1965, with the enactment of Medicaid, Congress
    created an entitlement to skilled nursing facility care. The Social
    Security Amendments of 1965 that created Medicaid required states to
    cover skilled nursing facility services and gave nursing home care the
    same level of priority as hospital and physician and other services.
        These early legislative developments were the basis for the
    beginnings of the modern day nursing home industry. Significant growth
    in the number of nursing homes occurred during the 1960s--from 1960 to
    1970 the number of homes more than doubled, from 9,582 to almost
    23,000, and the number of beds more than tripled, from 331,000 to more
    than one million.10 (In 2004, there were about 16,000
    nursing homes with 1.6 million beds.11)
    ---------------------------------------------------------------------------
        \10\ U.S. Congress, Senate Special Committee on Aging, Developments
    in Aging, 1970, S.Rept. 92-46, Feb. 16, 1970, Washington, D.C. Cited
    from the American Nursing Home Association Fact Book, 1969-1970.
        \11\ Centers for Medicare and Medicaid Services (CMS), OSCAR, cited
    by American Health Care Association. [http://www.acha.org/research].
    Data are for Dec. 2004.
    ---------------------------------------------------------------------------
        Intermediate Care Facilities for Persons with Mental Retardation.
    The early history of services to persons with mental retardation and
    developmental disabilities is characterized by the development of large
    state-financed institutions some of which were established during the
    latter part of the 19th century and continuing through the first part
    of the 20th century. In 1967, the number of residents in institutions
    peaked to almost 200,000 nationwide in 165 state-operated
    facilities.12
    ---------------------------------------------------------------------------
        \12\ David Braddock, et al., The State of the States in
    Developmental Disabilities, University of Illinois at Chicago, American
    Association of Mental Retardation, Washington, 1998.
    ---------------------------------------------------------------------------
        In 1971, federal financing for intermediate care facilities for the
    mentally retarded (ICFs/MR) was authorized under the Medicaid program;
    states that were able to meet the federal requirements governing care
    for persons with mental retardation in ICFs/MR shifted their state-
    financed facilities to the Medicaid program. Although care in ICFs/MR
    facilities is not a required service under state Medicaid plans, all
    states cover this care. Today, although some states are still faced
    with the legacy of large institutions, a major change has occurred
    toward care for persons with developmental disabilities in smaller,
    community-based residences as well as home-based services financed by
    Medicaid.
        Home and Community-Based Services. Medicaid supports a range of
    home and community-based long-term care services, including home health
    care, personal care services, and a range of supportive services under
    the Medicaid Section 1915(c) waiver program. The latter program has
    become the centerpiece of home and community-based services policies
    for certain persons with disabilities, especially persons with mental
    retardation and developmental disabilities, in most states. About
    840,000 persons were served under this program in 2001. Under Section
    1915(c) waivers, the most frequently provided services are personal
    care assistance and other home care services,
    habilitation,13 adult day care, case management, and respite
    services for caregivers.
    ---------------------------------------------------------------------------
        \13\ Habilitation refers to services to assist individuals in
    developing skills necessary to reside successfully in home and
    community-based settings. It includes such activities as prevocational,
    educational, and supported employment.
    ---------------------------------------------------------------------------
        Section 1915(c) allows the Secretary of the Department of Health
    and Human Services (DHHS) to waive certain statutory requirements to
    assist states in financing care at home and in other community-based
    settings for persons who, without these services, would be in an
    institution. States may waive the following Medicaid requirements: (1)
    statewideness--states may cover services in only a portion of the
    state, rather than in all geographic jurisdictions; and (2)
    comparability of services--states may cover state-selected groups of
    persons, rather than all persons otherwise eligible. In addition to
    waiving these requirements, states may use more liberal income
    requirements than would ordinarily apply to persons living in the
    community.
        Federal law requires that persons eligible for home and community-
    based waiver services meet the level of care requirements (as defined
    by each state) provided in a hospital, nursing facility or ICF/ME.
    Level of care requirements describe the level and/or severity of
    functional limitations that individuals must have in order to be
    admitted to an institutional setting.
        In implementing home and community-based waiver programs, States
    are constrained by a budget neutrality test in defining services they
    wish to cover. The law requires that the Secretary may not approve a
    waiver unless the average per capita expenditures for individuals
    provided waiver services do not exceed the average per capita
    expenditures that would have been paid if individuals had received
    Medicaid-supported institutional care. The Section 1915(c) waiver
    program has been particularly attractive to states because they have
    been able to control costs by limiting the number of waiver recipients
    and employing a variety of cost-management techniques, including fixed
    budgets, care management, and cost caps.
    Medicaid Long-Term Care Spending
        Medicaid is the dominant payer of long-term care services in this
    country paying for nearly one-half of all long-term care expenditures.
    Of total Medicaid spending--$269 billion in FY2003--more than one-third
    was spent on long-term care.
        Of total Medicaid long-term care spending--$83.8 billion in FY2003:

     67% was spent on institutional care (nursing homes and ICFs/MR); and
     33% was spent on home and community-based services (home health,
            personal care and home and community-based waiver services).
        From 1990 through 2003,14 Medicaid long-term care
    expenditures grew at an annual average rate of 8% per year.
    Institutional spending grew at an annual average rate of growth of 6%.
    States' efforts to focus on home and community-based services has
    resulted in a higher rate of growth for these services, growing at an
    average of 17% per year. Expenditures for the Section 1915(c) waiver
    program in particular grew at an average annual rate of 25%, and
    reached almost $18 billion in FY2003. This increase has been a result
    of states' effort to contain the rate of growth in their nursing home
    expenditures and to provide expanded access to home and community-based
    services to persons with disabilities in order to respond to their
    preferences for this modality of care.
    ---------------------------------------------------------------------------
        \14\ Growth rates shown have been calculated on a calendar year
    basis.
    ---------------------------------------------------------------------------
        For many years, spending for institutional care has dominated
    Medicaid long-term care spending. However, over the last 15 years,
    Medicaid spending for long-term care has experienced a change in
    composition. In FY1990, 87% of long-term care spending was devoted to
    institutional care, declining to 67% by FY2003. In FY1990, about 13% of
    Medicaid long-term care spending was for home and community-based care,
    increasing to about 33% by FY2003, primarily as a result of increased
    spending under the Section 1915(c) waiver program. (Figure 4). This
    waiver program has been a significant source of support to care for
    persons with mental retardation and developmental disabilities. In
    FY2003, about three-quarters of waiver spending was for this
    population; the balance was spent on diverse groups of persons with
    disabilities, including the elderly and persons with physical
    disabilities. Despite the growth in home and community-based waiver
    services, many of these home and community-based waiver programs have
    been unable to meet the demand for services and maintain waiting lists.

                        LONG-TERM CARE: THEMES OF REFORM

        Despite enormous spending on long-term care services, the nation
    lacks a comprehensive policy on financing of long-term care. Options to
    change the way long-term care is financed and delivered have been
    considered by Congress for over 35 years. The complexity of financing
    and delivering these services to diverse groups of persons with
    disabilities in a variety of care settings through multiple federal
    programs has been a challenge to federal and state governments.
        Even after significant federal policy review on ways to improve the
    long-term care financing and delivery over the last two decades,
    Congress has not reached consensus of what road to take. The last time
    Congress made a systemic change in federal long-term care policy was in
    1981 when it created the Medicaid Section 1915(c) home and community-
    based waiver program for persons with disabilities. In 1996, Congress
    clarified the tax treatment of long-term care insurance and allowed
    taxpayers who itemize a limited deduction for premiums. Other changes
    have included changes in Medicaid eligibility rules for long-term care
    services when in 1988, Congress provided financial protections for
    spouses of persons needing nursing home care and other Medicaid
    services, and again in 1993 when Congress tightened rules on transfer
    of assets. In 2000, Congress recognized the needs of caregivers by
    authorizing a caregiver support program under the Older Americans Act.
    That same year, Congress established a voluntary long-term care
    insurance program for federal employees, retirees, and family members.
    The last time that Congress comprehensively reviewed policy options for
    long-term care reform was in 1990 under the U.S. Bipartisan Commission
    on Comprehensive Health Care (known as the Pepper Commission).
        Literally dozens of proposals have been considered and debated. For
    the past two decades, the principal debate in financing long-term care
    reform has focused on the respective roles of the public and private
    sectors. Proposals that have been debated are arrayed on a spectrum. On
    one end, are proposals for new social insurance programs that would
    expand or replace current programs, perhaps relying on payments from
    individuals through cost-sharing, premiums and deductibles, rather than
    means-testing and spend-down requirements under Medicaid. At the other,
    are proposals that rely on private sector financing, such as long-term
    care insurance, with the rationale that the nation cannot afford the
    additional tax burden of another entitlement program.
        Other subsidiary issues in the reform debate have included
    proposals to address the costs and quality of care; create more
    incentives for home and community-based care; assist family caregivers;
    and encourage individuals and families to plan for the potentially
    catastrophic costs of care.
        The following presents broad themes of proposals that have been
    advanced.
        Insurance Options. Many believe that the need for long-term care is
    an insurable event where risk of needing services is not effectively
    spread across the population through pooled risk. Proposals for
    expanding insurance for long-term care, either on a mandatory or
    voluntary basis, have been considered in the past. For example, the
    Pepper Commission took the stand that long-term care should be treated
    as an insurance event whose risk can be spread through both public and
    private coverage.15 In 2001, Citizens for Long-Term Care, a
    coalition of over 60 national organizations representing major national
    associations of long-term care providers, insurers, and advocacy groups
    also came to this conclusion.16
    ---------------------------------------------------------------------------
        \15\ U.S. Bipartisan Commission on Comprehensive Health Care, The
    Pepper Commission, A Call to Action. Final Report, 1990, Washington,
    D.C., p. 119.
        \16\ Citizens for Long Term Care, Defining Common Ground, Long Term
    Care Financing Reform in 2001, Feb. 2001, Washington. D.C., p. 3.
    ---------------------------------------------------------------------------
        Some people believe that a social insurance approach is necessary
    to assure universal coverage (at least for a defined target population)
    since may persons with disabilities will not be able to afford private
    coverage. Such a program would have to be designed to assure
    affordability for both the public sector as well as individual
    participants. Others believe that costs of a new or expanded social
    insurance program would be prohibitive. Some proposals have suggested
    government-sponsored voluntary insurance programs. Such approaches
    could be designed to attract persons in middle ages or younger who want
    to plan for future long-term care costs, but may not attract sufficient
    numbers of persons to create an insurance pool. Also, voluntary
    programs may have to be designed to encourage participation by persons
    at the lowest economic scale.
        Options to create incentives for individuals to purchase private
    long-term care insurance have been proposed frequently. The number of
    polices sold has increased in recent years with over 9 million polices
    sold from the inception of the market through the end of
    2002.17 The market grew at an average of 18% each year from
    1987 to 2002.18 For some people, insurance is a viable
    option and can assist them in paying for catastrophic long-term care
    expenses. However, policies can be expensive for purchase by low and
    moderate income persons.
    ---------------------------------------------------------------------------
        \17\ This number does not include the number of policies dropped,
    canceled, or lapsed.
        \18\ American Health Insurance Plans, Long-Term Care Insurance in
    2002, June 2004., Washington, D.C.
    ---------------------------------------------------------------------------
        Another possible means of providing access through an insurance
    approach might be to extend Medicaid coverage for people who have
    higher income or more assets than current Medicaid tests allow, and
    then requiring them to pay premiums and cost-sharing (as is the case in
    certain Medicaid state optional programs, such as for working disabled
    under the Ticket To Work program). Depending upon how it is structured,
    such an approach could assist persons with catastrophic costs according
    to their ability to pay. However, policymakers may be more concerned
    about containing, rather than expanding, long-term care benefits.
        Shared Public and Private Options. Some observers argue that the
    complexity of long-term care financing for diverse groups of
    individuals with disabilities--children and working age persons with
    disabilities, as well as the elderly, with differing types and severity
    of impairments--necessitates a multi-pronged strategy of financing and
    delivery reform. Because of the diverse socio-economic and disability
    characteristics of the population in need, one approach to financing
    reform may not fit all people. Defining the public and private sector
    roles in financing long-term care for these groups would need to
    account for their varying needs and financial abilities.
        Approaches might combine some aspects of incentives for private
    financing as well as public financing. Strategies that would promote
    both private insurance for those who could afford premiums, as well
    those that would preserve safety net programs for those who cannot
    afford catastrophic expenses or private financing solutions, might be
    sought.
        Policymakers will have to evaluate the proposals in light of a
    number of dimensions. This would include their potential budgetary
    impact, including their potential to increase total costs, to decrease
    an otherwise expected rate of increase in costs in one sector of care
    (for example, by substituting less costly per beneficiary services for
    more costly services), or across multiple programs, or within an
    individual program. Other dimensions might include the proposals'
    potential effect on aspects of service delivery goals, such as
    assisting persons to reside in community settings rather than in
    institutions, and assisting informal caregivers to continue their
    support for family members.
        Rebalancing Institutional and Home and Community-Based Services
    Options. Over the last three decades, a constellation of proposals has
    been made to level the playing field so that home and community-based
    services receive the same priority as institutional services under
    Medicaid. A factor sharpening recent federal and state policy attention
    on home and community-based care are legal actions that have taken
    place in states as a result of the 1999 Supreme Court decision,
    Olmstead v. L.C. (528 U.S. 581). In this decision, the Court stipulated
    that, under certain circumstances, institutionalization of persons who
    could live in community settings, and desire to do so, violates the
    Americans with Disabilities Act (ADA).
        Many people refer to Medicaid as having an ``institutional bias''
    since nursing home care is an entitlement for persons who can meet
    eligibility tests, but the Section 1915(c) waiver program, the primary
    source of financing home and community-based services, is not. Numerous
    proposals have been made to reformulate the Section 1915(c) home and
    community-based services waiver program (e.g., by eliminating its
    ``wavier'' nature and changing certain eligibility features) and to
    expand personal care services. Some believe that such approaches would
    give this type of care the same priority as institutional care. Others
    are concerned that if such programs were expanded without controls on
    numbers of persons to be served, costs would increase.
        Such approaches would have to evaluated in terms of total cost.
    Nevertheless, some state administrators have maintained that it is
    possible to control the rate of increase in long-term care costs that
    would have occurred by instituting systemic reform that includes (1)
    controlling access to institutional care and limiting its supply; (2)
    expanding home and community-based care for those who otherwise need
    institutional care; (3) and balancing consumer choice with appropriate
    cost controls.
    Policy Questions
        The answers to a number of policy questions will influence the
    future direction of federal policy:

     Given expected demographic changes as a result of population aging,
            and expected escalating public spending for long-term care,
            what should be the respective roles for the public and private
            sector?
     Should any revised public long-term care strategy be universally
            available to a specific group of people, or should it be
            targeted on the basis of income and/or disability? If it is
            available on the basis of income, how should income and assets
            should be considered?
     What is the best way to provide individuals with incentives to save
            personal funds for long-term care and/or purchase insurance to
            protect themselves from high out of pocket expenses for long-
            term care?
     How can individuals and families be encouraged to plan for long-term
            care expenses as part of planning for a secure retirement?
     Can federal policies be changed to better best assist family members
            and other informal caregivers who already provide most long-
            term care support?
     Can federal policies be changed to address access issues for services
            for those who do not have family caregivers?
     To what extent do public programs need to be balanced to support
            increased home and community-based services? How can we assure
            that all modalities of care meet quality measures?
        As it considers these questions, Congress might continue making
    incremental policy changes like those of the past two decades. On the
    other hand, many believe that incremental changes may not be sufficient
    to prepare for future needs and that larger scale reform may be
    necessary.

    [GRAPHIC] [TIFF OMITTED] T0749.008

    [GRAPHIC] [TIFF OMITTED] T0749.009

        Mr. Deal. Thank you. Ms. Ignagni.

                       STATEMENT OF KAREN IGNAGNI

        Ms. Ignagni. Thank you, Mr. Chairman and Mr. Brown. We
    appreciate the opportunity to testify this afternoon, and very
    much appreciate the focus that the committee is placing on the
    issue of long-term care.
        As we prepared for today's testimony, and as you grapple
    with the issue, we wanted to leave you with the proposition
    that has been stated over and over today, and most recently by
    Mr. Page, that it is time to enlarge the healthcare discussion,
    to broaden it and to have a paradigm shift to recognize that we
    can't think in silos about healthcare any more. We need to
    break down the barriers between acute care and long-term care,
    and begin to think about a continuum of care.
        And when you look at the data, almost half of the
    population over 65 will need nursing home care as they go
    through their lives, and the average stay is roughly 2.4 years.
    We also know that Medicaid has been in silos. The focus has
    been, in reaching out to the private sector for tools and
    techniques, has been primarily, until recently, on the acute
    care side. We think we have not only a great deal to contribute
    on that side, but also, something significant to contribute to
    shore up the Medicaid program on the long-term care side.
        Finally, in our view, tax policy has held the Nation back,
    because it hasn't really kept up with supporting families who
    want to protect themselves, who are able to and would like the
    opportunity. So recognizing that the committee is seeking the
    balance point between public and private sector strategies, as
    my colleagues have observed, we have tried to provide you
    information about three things.
        First, what tools our members have brought to the Medicaid
    program, not only to contain costs, but to preserve benefits to
    avoid cutbacks and to preserve value, and to increase value. We
    have provided a lot of data. We would be delighted to provide
    more. There is a real opportunity, a positive story to tell. We
    think we can do more in the area of long-term care, and we are
    pleased that States are turning to our members to use their
    tools and techniques in that arena.
        Second, we have provided information. There has been a
    great deal of discussion today about how the long-term care
    market works. We have also, third, tried to provide information
    and specific strategies that could be considered to encourage
    families who would like to purchase private long-term care
    insurance.
        The point we would like to leave you with is by not having
    affirmative policy, you have created a policy. It has been we
    have backed into it. It is not organized, but there is a policy
    here, where families who want to save and protect themselves in
    the future aren't supported. For example, we have had some
    discussions about the above the line deduction. There is also
    the issue of flexible benefit plans not being able to be used
    for long-term case purchase, 125 cafeteria plans. Those issues,
    we think, could be considered.
        We know that is not necessarily in the province of this
    committee, but as you grapple with the issues of what to do,
    and where to put that balance point, we thought it was
    important to raise. We also think that it is unfortunate that
    States have to get exceptions to move in the area of home and
    community-based care, rather than being allowed to do that as a
    matter of course, and there was certainly a great deal of
    discussion about that with Dr. McClellan.
        In our view, the Nation can do better. We think that there
    can be strategies that could be tangibly undertaken very
    quickly. We have tried to provide information on the cost of
    private insurance policies. We have provided and anticipated
    questions about lapse rates, and how long people keep long-term
    care policies. I would like to affirmatively discuss consumer
    protections. Our members strongly support the HIPAA
    requirements. We have supported the model requirements, and we
    have worked hand in hand with the NAIC in developing those
    model requirements.
        So in summary, Mr. Chairman, Mr. Brown, we have suggested
    three categories of tangible strategies. First, to preserve
    benefits in the Medicaid program, we have talked about the
    kinds of cost effectiveness--I apologize for the voice--I have
    asthma, and these allergy days are particularly difficult for
    people in that condition. We have talked about cost
    effectiveness, and higher quality services that we can bring to
    Medicaid. We have also talked about the tax incentives to
    expand access to families who want to save for long-term care.
    And we have talked about expanding partnerships and hopefully
    have given you some information that you can use on the
    partnerships to consider a direction for expanding those, and
    expanding access, and making it possible to put the balance
    point in the right place between public and private sector
    strategies.
        Thank you, Mr. Chairman, and I apologize about the voice.
        [The prepared statement of Karen Ignagni follows:]

       Prepared Statement of Karen Ignagni, President and CEO, America's
                             Health Insurance Plans

        Good morning, Mr. Chairman and members of the subcommittee. I am
    Karen Ignagni, President and CEO of America's Health Insurance Plans
    (AHIP), which is the national trade association representing nearly
    1,300 private sector companies providing health insurance coverage to
    more than 200 million Americans. Our members offer a broad range of
    health insurance products in the commercial marketplace and also have
    demonstrated a strong commitment to participation in public programs.
        We appreciate this opportunity to testify about long-term care and
    the Medicaid program. We share your commitment to meeting the long-term
    care needs of our nation's aging population and, at the same time,
    ensuring that Medicaid's financial stability is not threatened by the
    high costs associated with long-term care.
        In our view, it is time for a paradigm shift in the health care
    discussion. Our current health care system focuses primarily on
    treating episodes of acute illness, rather than managing chronic
    conditions. This is true despite the fact that 20 percent of all
    Medicare beneficiaries--chronically ill patients with five or more
    medical conditions--accounted for more than two-thirds of the Medicare
    program's costs in 2004. Likewise, long-term chronic care management is
    a key cost issue for Medicaid. Our tax system has followed a similar
    pattern by orienting incentives toward the coverage of acute care
    benefits. To meet these challenges, the nation needs to broaden the
    health care discussion to focus on the continuum of health care
    services that people need throughout their lives.
        In the next 30 years, more than half the U.S. population will be
    living with at least one chronic condition. Chronic illnesses such as
    cancer, diabetes, Alzheimer's disease and hypertension complicate age-
    related health problems and increase the likelihood of needing long-
    term care. Currently, nearly half of all nursing home residents have
    Alzheimer's disease. By 2050, the Alzheimer's Association estimates
    that 14 million baby boomers, nearly one in five, will find themselves
    living with the disease. We need to make major adjustments to address
    21st-century realities and our aging population. At the same time, we
    need to explore a range of public-private partnerships that could make
    long-term care costs more predictable and expand service options for
    consumers.
        This should be a particularly important priority considering that
    Medicaid currently covers about 45 percent of all long-term care
    expenditures. Even though fewer than 10 percent of Medicaid
    beneficiaries use long-term care services, more than one-third of total
    Medicaid spending is devoted to long-term care.
        My testimony today will focus on three areas:

    (1) What our members are doing to contain costs and improve quality in
            Medicaid by working in partnership with the states;
    (2) An overview of the long-term care insurance market and the role
            that long-term care insurance can play in relieving financial
            pressure on Medicaid; and
    (3) Tangible policy changes that could be pursued to assist families
            interested in saving for long-term care.
        The activity in these areas will show that AHIP's members are
    actively engaged in providing consumers with both private and public
    options for meeting the challenges raised by long-term care and chronic
    conditions.

              THE SUCCESS OF PRIVATE SECTOR STRATEGIES IN MEDICAID

        Health insurance plans have made an important contribution toward
    making it possible for Medicaid programs to use their limited resources
    to expand access, improve quality, provide transportation services, and
    take other steps to better serve beneficiaries.
        In a number of states, our members are participating in initiatives
    to improve the quality of long-term care while stretching Medicaid
    dollars. Most of these programs--including initiatives in Texas,
    Arizona, Massachusetts, Wisconsin, New York, Florida and Minnesota--
    seek to decrease the need for nursing home care, reduce
    hospitalizations, and increase the number of elderly and disabled who
    can be better served in home and community settings. For beneficiaries,
    this means improved health outcomes and the opportunity to receive care
    in a familiar setting of their own choice.
        These programs not only save money and improve the quality of care,
    but also deliver extremely high patient satisfaction. In Texas, the
    STAR+PLUS program saved the state $17 million dollars in the first two
    years in just one county, and reduced emergency room use by 40 percent
    and inpatient admissions by 28 percent. In Minnesota Senior Health
    Options--which combines health care and support services into a
    seamless package--Medicaid enrollees report a 94 percent satisfaction
    rate with their care coordinators.
        Further successes are documented in an July 2004 report
    1, conducted by the Lewin Group, which provides a synthesis
    of 14 separate research studies that demonstrate the cost savings to
    states and the high quality health care offered by Medicaid managed
    care programs. These savings have been particularly important as states
    confront Medicaid funding shortfalls that have challenged their ability
    to deliver services without cutting benefits or eligibility.
    ---------------------------------------------------------------------------
        \1\ The Lewin Group, Medicaid Managed Care Cost Savings--A
    Synthesis of Fourteen Studies, July 2004
    ---------------------------------------------------------------------------
        The studies examined by this report attribute significant cost
    savings to Medicaid managed care. One study, for example, found that
    Michigan's Medicaid managed care program yielded cost savings of 14
    percent in FY 2002, 16 percent in FY 2003, and 19 percent in FY 2004.
    Another study, focusing on Wisconsin, measured savings of 7.9 percent
    in 2001 and 10.2 percent in 2002.
        A number of other studies focus more narrowly on specific services
    or population subgroups. One study found that Arizona's managed care
    program, which fully capitates prescription drug costs, delivered
    pharmaceuticals to the aged, blind and disabled at a per-member, per-
    month cost of $112.21 in 2002, the lowest figure in the nation and 38
    percent below the national average. Another study found that cost
    savings of approximately 10 percent were achieved by moving adult women
    in Hennepin County, Minnesota from fee-for-service coverage to Medicaid
    managed care coverage.
        The report notes that these cost savings are largely attributable
    to decreases in utilization of inpatient hospital services. For
    example, preventable hospitalizations in California were found to be 38
    percent lower in managed care than in fee-for-service for mothers and
    children enrolled in Medicaid--and 25 percent lower in managed care
    than in fee-for-service for Supplemental Security Income (SSI)
    recipients.
        The report further states that in addition to achieving cost
    savings on behalf of beneficiaries, Medicaid managed care programs have
    improved access to care for Medicaid beneficiaries in most cases. It
    also indicates that both state programs and individual managed care
    organizations have earned high satisfaction ratings from enrollees.
        Another report 2, released by AHIP in March 2005,
    outlines numerous examples of how health insurance plans serving
    Medicaid beneficiaries have implemented programs that are improving the
    health care of beneficiaries and providing value to state governments
    through innovative and cost-effective programs. The progress achieved
    by these pioneering programs is evidenced by this sample of the
    report's findings:
    ---------------------------------------------------------------------------
        \2\ AHIP, Innovations in Medicaid Managed Care, March 2005

     Access to Care: Medicaid beneficiaries served by health plans in New
            York City report that they have better access to care than
            patients in the fee-for-service program, and are more likely to
            have a regular source of care and to seek care at a doctor's
            office rather than in emergency rooms. As a result, these
            beneficiaries are more likely to receive the appropriate
            primary care and preventive services than their counterparts in
            the fee-for-service program.
     Prenatal Care: Infant mortality rates in Rhode Island have dropped
            dramatically--from 4.5 deaths per 1,000 births to 1.9 per
            1,000--since health insurance plans began providing care for
            pregnant women enrolled in the state Medicaid program.
     Asthma: Children with asthma enrolled in Medicaid health insurance
            plans in Wisconsin are significantly less likely to require
            hospitalization than asthmatic children in the state's fee-for-
            service programs. The lower hospitalization rate for these
            children means that they are enjoying better health and are
            likely to have fewer absences from school.
     Diabetes: Among Medicaid participants with diabetes in North
            Carolina, those served by health insurance plans are three
            times more likely to properly monitor and control their blood
            glucose levels. This translates into better health status for
            diabetes patients--with fewer complications that otherwise
            would increase the threat of blindness, amputations, and other
            health problems.
        Our members have designed programs that work for Medicaid
    beneficiaries and also for the states. The successful programs
    implemented by health insurance plans demonstrate quality improvement
    and cost containment through innovative outreach programs that meet
    budgetary needs and provide access to more coordinated and effective
    health care.

                  THE ROLE OF PRIVATE LONG-TERM CARE INSURANCE

        The number of individuals purchasing long-term care insurance has
    grown dramatically in recent years. Since 1996, the number of policies
    purchased has more than doubled, increasing from 4.9 million to about
    10 million policies sold.
        Policies contain a wide range of benefit options at moderately
    priced premiums. For example:

     Long-term care insurance plans offer coverage of nursing home,
            assisted living facility, home health care, hospice care,
            respite care, and certain alternate care services not listed in
            the policy.
     Other common benefits include: care coordination or case management
            services, support with activities of daily living, medical
            equipment coverage, home-delivered meals, spousal discounts,
            survivorship benefits, and caregiver training.
     Plans contain provisions that guarantee their renewability, have a
            30-day ``free look'' period, cover Alzheimer's disease, provide
            for a waiver of premiums once a claim is processed, and give
            policyholders the option of covering nursing home stays without
            limits or caps.
     Age limits for purchasing coverage also are expanding. Our members
            now offer individual policies to people as young as 18 and as
            old as 99. In addition, recognizing that consumers want to plan
            ahead for their long-term care needs, plans offer inflation
            protection for the dollar value of a purchased benefit at an
            annual 5 percent compounded rate, funded with a level premium
            that stays the same from one year to the next. Companies also
            offer plans that have a non-forfeiture benefit that allows
            beneficiaries to retain some benefits if they lapse their
            policy.
        The growth in employer-sponsored plans is especially encouraging,
    since individuals with employer coverage will not be forced primarily
    to depend on their states for assistance in meeting their long-term
    care expenses. The average age of the employee electing this coverage
    is 45--compared to an average age of 60 for persons who buy long-term
    care insurance outside of the employer-sponsored market. To date, close
    to 2 million policies had been sold through more than 5,600 employers,
    and accounted for one-third of the sales in 2002.
        Premiums for long-term care insurance policies depend on multiple
    factors, including the entry-age of the policyholder and
    comprehensiveness of the benefit package selected. At the same time,
    the committee should be aware that average premiums have remained
    stable over time. AHIP estimates that a vast majority of long-term care
    policies currently in effect today have never experienced a rate
    increase. In addition, within the past few years there have been
    significant enhancements to long-term care insurance (for example,
    prior hospitalization requirements have been eliminated and benefits
    have been expanded to include coverage in assisted living facilities,
    adult day care and home health care, in addition to nursing home care),
    and therefore that give buyers more benefits for their premium dollars.
        Table 1 illustrates the average cost of long-term care premiums,
    depending on when the policy is purchased.

      Table 1: Average Annual Premiums for Leading LTC Insurance Sellers in
                                      2002
    ------------------------------------------------------------------------
                                                                   With 5%
                                                                    Comp.
                    Age of Purchaser                     Base     Inflation
                                                                  Protection
                                                                     (IP)
    ------------------------------------------------------------------------
    40..............................................       $422         $890
    50..............................................       $564       $1,134
    65..............................................     $1,337       $2,346
    79..............................................     $5,330       $7,572
    ------------------------------------------------------------------------
    NOTE: Premiums are generally for a $150 daily benefit amount, four years
      of coverage, and a 90-day elimination period.

    Consumer Protections--Strengthening the Market
        A vital component of this effort to strengthen the market for long-
    term care insurance is the adoption of robust standards for consumer
    protection. Because we recognize that consumer protections are critical
    toward engendering confidence in the market, AHIP and our member
    companies are committed to providing quality products, transparency in
    our products, and consumer choice. We view these protections as key to
    giving consumers confidence, expanding the market, and providing viable
    solutions to work hand in hand with Medicaid coverage for the poor.
        In the past, there have been questions about post-claims
    underwriting. Our position is that this is never justifiable. On the
    other hand, efforts to detect and prevent fraud should not be viewed as
    post-claims underwriting. AHIP supports the strong stand taken on this
    issue by the National Association of Insurance Commissioners (NAIC). We
    also support the NAIC's most recent Long-Term Care Insurance Model Act
    and Regulations and the Health Insurance Portability and Accountability
    Act's (HIPAA) consumer protections for long-term care insurance.
        To give the committee a broad picture of the value of the HIPAA
    provisions, below are some of the key requirements:

     requiring policies to guarantee renewability;
     specifying the only circumstances when coverage could be canceled or
            rescinded, such as when the applicant committed fraud to obtain
            coverage;
     requiring ``free-look'' periods immediately after issue and grace
            periods for premium payments;
     limiting the circumstances where benefits need not be provided, such
            as in the case of alcoholism or drug addiction;
     requiring numerous disclosures, including an outline of coverage, and
            building in notice and other safeguards to prevent unintended
            lapses of policies; and
     establishing minimum standards for home health benefits; and
            requiring that policies be offered with inflation protection
            and non-forfeiture of benefits provisions.
        In addition, federal legislation enhancing the tax treatment of
    long-term care insurance contracts should include components of the
    2000 NAIC Models. As an example, AHIP recommends that the Model
    provisions relating to the benefits consumers are to receive if they
    choose not to continue their policy and required disclosure to
    consumers relating to rate stability be added as new standards for tax-
    enhanced long-term care insurance contracts.
          how to support families that want to save for long-term care
    A. Federal Tax Incentives
        AHIP supports federal legislation to enact both an above-the-line
    tax deduction for long-term care insurance premiums--which means that
    they would be deducted directly from a taxpayer's adjusted gross income
    (the ``line'')--and a tax credit of up to $3,000 for those with long-
    term care needs or their caregivers. This legislation has been
    introduced in every legislative cycle since 1999-2000 and the current
    level of support reflects growing congressional interest in this issue.
        The proposal for an above-the-line tax deduction would allow
    taxpayers to claim a tax deduction regardless of whether they itemize
    their deductions and regardless of whether they have other medical
    expenses. For example, a person who pays $1,500 in premiums for long-
    term care insurance could reduce his or her taxable income by the full
    $1,500 under this proposal.
        By contrast, current law allows taxpayers to deduct premiums for
    long-care term insurance only if they itemize deductions and only to
    the extent that their medical expenses exceed 7.5 percent of their
    adjusted gross income. In other words, a person with an adjusted gross
    income of $40,000 must have $3,000 in medical expenses before he or she
    can claim any tax deduction for long-term care insurance premiums or
    any other medical expenses. Because this threshold is so high under
    current law, fewer than five percent of all tax returns report medical
    expenses as itemized deductions. An above-the-line tax deduction would
    eliminate this 7.5 percent threshold and allow all long-term care
    insurance policyholders to claim a tax deduction.
        AHIP also supports legislative provisions that would enable
    employers to offer long-term care insurance as an option under
    cafeteria plans, which allow employees to customize their benefits
    packages, and under flexible spending arrangements, which allow
    employees to use pre-tax dollars to pay for medical expenses not
    covered by health insurance.
        Allowing employees to purchase long-term care insurance on a pre-
    tax basis through these popular employee benefit arrangements would
    allow more families to purchase coverage. Moreover, this would put
    long-term care insurance on a level playing field with other employer-
    sponsored benefits--such as 401(k) contributions--that are not taxed.
        As Congress considers federal tax incentives, we urge lawmakers to
    recognize that more than 20 states have enacted enhanced tax incentives
    for the purchase of long-term care insurance. These states are:
    Alabama, California, Colorado, Hawaii, Idaho, Indiana, Iowa, Kansas,
    Kentucky, Maine, Maryland, Minnesota, Missouri, Montana, New York,
    North Carolina, North Dakota, Ohio, Oregon, Utah, Virginia, West
    Virginia, and Wisconsin. These state laws have taken an important first
    step to enhance the affordability of long-term care insurance. By
    enacting an above-the-line tax deduction at the federal level, Congress
    can create a more powerful incentive--with the states working in
    partnership--for all Americans to protect themselves against the
    financial risk of long-term care needs.
    B. Partnerships
        AHIP also supports the expansion of public-private long-term care
    ``partnerships'' similar to those that currently operate in New York,
    California, Connecticut, and Indiana into a nationwide program. These
    partnerships allow consumers in these states to purchase long-term care
    insurance with the understanding that if their policy benefits are
    exhausted, the government will cover the costs of their continuing care
    through Medicaid without first requiring them to ``spend down'' their
    life savings and become impoverished. There are two partnership models:

     The ``dollar-for dollar'' model allows beneficiaries to protect a
            specified level of assets equal to the amount of long-term care
            insurance they purchase. If a beneficiary purchases $100,000 of
            coverage, he or she is assured that $100,000 of his or her
            assets will be exempt from any Medicaid ``spend down''
            requirements that otherwise would apply.
     The ``total asset protection'' model allows beneficiaries to protect
            all of their assets, provided that they purchase a long-term
            care policy for a minimum number of years, typically three or
            four years.
        AHIP envisions that a partnership model implemented on a national
    basis would encourage the growth of the long-term care insurance
    marketplace in a more effective and cost-efficient manner. This
    national or federal model should mirror HIPAA long-term care tax-
    qualified requirements and would allow Medicaid protection in all
    states, regardless of where one purchases a long-term care policy.
        Among more than 180,000 partnership policies that have been sold in
    these states since 1992, only 89 individuals have exhausted their
    private benefits and accessed Medicaid benefits, and almost 30 percent
    of policyholders surveyed said they would not have purchased a long-
    term care policy in the absence of the partnership program.
    C. Other Strategies
        To meet the challenges presented by long-term care, policymakers
    should focus broadly on as many bold and creative ideas as possible. In
    addition to the proposals already discussed, a number of other
    innovative approaches may be worth pursuing as part of a multi-faceted
    strategy for financing the growing costs associated with long-term
    care:

     State-based and national education campaigns could play an important
            role in making consumers aware of their options for protecting
            themselves from the risks associated with long-term care costs.
            The existing CMS Long-Term Care Awareness Campaign, developed
            for five states, could be expanded to other states using
            resources jointly provided by CMS, state Medicaid programs,
            long-term care insurers, long-term care providers, and other
            stakeholders.
     Any number of innovative new partnerships between long-term care
            insurers and Medicaid programs could be explored. One
            possibility would be a partnership in which long-term care
            insurers would manage a state's Medicaid long-term care
            population. Another option would be to expand state Medicaid
            managed care programs to cover the entire continuum of health
            care services including acute care and long-term care.
     State-based CMS demonstration programs could be expanded to help
            states meet their long-term care costs in Medicaid. This
            approach would allow states to test innovative partnerships as
            part of an incremental approach to developing broad-based
            solutions.
    Consumer Education and Transparency
        As the market grows and adapts to consumer needs and expectations,
    the private sector and government at all levels should encourage a
    broad consumer education campaign. The NAIC Models could also serve to
    enhance the ability of consumers to compare products and make more
    informed decisions about need and suitability. In fact, the NAIC models
    provide guidance on suitability to help consumers select appropriate
    products and to ensure that agents are in turn selling products
    compatible with a consumer's particular needs.
        Finally, I would like to mention that AHIP actively works with
    federal and state long-term care education campaigns, and we produce
    and regularly update a ``Guide to Long-Term Care Insurance.'' The Guide
    includes advice on how families should evaluate their long-term care
    needs, what the costs are, and how to choose long-term care insurance
    coverage. To date, we have distributed over 1 million copies of the
    Guide.
        We have also partnered with the General Services Administration's
    Federal Consumer Information Center (FCIC), which has identified this
    publication as its ``guide of choice'' on long-term care insurance. The
    Guide is available to consumers, at no charge, through the FCIC by
    phone [1-888-8 PUEBLO], on the web at www.pueblo.gsa.gov/cic--text/
    health/ltc/guide.htm.
                                   conclusion
        We hope this information about the long-term care market, what our
    members already are doing to partner with states under Medicaid, and
    policy solutions for providing expanded access to coverage are useful
    to the committee. If these recommendations are implemented, there will
    be tangible benefits 3 for consumers and for Medicaid and
    Medicare:
    ---------------------------------------------------------------------------
        \3\ LifePlans, Inc., Benefits of Long-Term Care Insurance,
    September 2002
    ---------------------------------------------------------------------------
    Potential Benefits to Consumers
        Having long-term care insurance allows those with chronic illnesses
    and the disabled to remain in their homes. Approximately half of
    patients and family caregivers interviewed by trained nurses and social
    workers said that in the absence of their long-term care insurance
    benefits, the patients would not be able to remain in their homes and
    would have to seek institutional alternatives.
        We know that consumers with private long-term care insurance
    receive an average of 14 more hours of personal care per week than
    similarly disabled non-privately insured elders. Consumers with long-
    term care insurance are 66 percent less likely to become impoverished
    to pay the costs of long-term care, and long-term care insurance
    reduces the out-of-pocket expenses of disabled elders. The average
    reduction in out-of-pocket nursing home costs is between $60,000 and
    $75,000 and can total more than $100,000.
    Potential Benefits to Medicaid and Medicare
        Long-term care insurance can reduce state and federal Medicaid
    expenditures and federal Medicare home health expenditures. Medicaid
    savings are projected to total about $5,000 for each policyholder with
    long-term care insurance and Medicare savings are estimated to exceed
    $1,600 per policyholder.
        Aggregate savings to Medicare and Medicaid for the current number
    of policyholders are estimated at about $30 billion. These savings will
    grow as more people acquire policies and the average age of purchasers
    continues to decline.
        AHIP and our member companies look forward to working with the
    subcommittee to address the challenges associated with long-term care
    and Medicaid. We are eager to share our ideas and contribute to a
    constructive debate on this issue. We also support efforts to establish
    a Bipartisan Commission on Medicaid. If Congress provides for such a
    commission, we will be pleased to work with this body to contribute to
    the discussion about steps that can be taken to strengthen Medicaid to
    better meet the health care needs of beneficiaries.
        We appreciate the opportunity to testify on these important issues
    and look forward to your questions.

        Mr. Deal. Thank you very much. Mr. Moses.
        Mr. Moses. Thank you, Mr. Chairman, Mr. Brown, members.
        Mr. Deal. Turn your microphone on, please. I believe--or
    get closer. One or the other.

                      STATEMENT OF STEPHEN A. MOSES

        Mr. Moses. Thank you for this privilege of addressing you
    on an issue that has been my personal and professional passion
    for 22 years, starting with, as a career, U.S. Government
    employee with the Health Care Financing Administration, later
    with the Office of the Inspector General of the Department of
    Health and Human Services, and then in the private sector, and
    now, in the nonprofit sector.
        I wanted to focus today on a couple of questions. Really,
    what are we talking about here in the area of asset transfers,
    and why is there so little empirical evidence of how widespread
    this practice is? Really, asset transfer is an
    oversimplification. What we are talking about here is Medicaid
    estate planning, which is all of the techniques that are used
    to help people qualify for Medicaid without spending down, by
    either sheltering or divesting assets. It may involve asset
    transfers. As you know, you can give away any amount of assets,
    as long as you do it 3 years in advance, or put assets into
    trusts within 5 years. You can give away half the assets and
    qualify in--with half the penalty. It is called the half a loaf
    strategy. One can give away double the cost of a nursing home
    in many States, at least the cost of a nursing home in all
    States without incurring a penalty beyond the current month,
    and of course, assets can be transferred in unlimited
    quantities between spouses, and that is a technique often used
    to avoid estate recovery.
        But Medicaid planning is much more than asset transfers. It
    is purchase of exempt assets. You can retain a home and all
    contiguous property, regardless of value. You can have a
    business, including the capital and cash-flow, of unlimited
    value. You can purchase prepaid burials, not only for the
    Medicaid recipient, but for the entire family. You can have a
    car, a business, term life insurance in unlimited value. A
    common technique is to pay children for their help, transfer
    assets, transfer a home while retaining a life estate, get a
    Medicaid-friendly annuity, use a life care contract. I have
    even seen many times the recommendation of a divorce.
        Now, why is it that, since we all know this is going on,
    there is so little empirical evidence? I think there are
    basically two reasons. First of all, it is kind of a dirty
    little secret. Adult children who take early inheritances and
    put their parents in nursing homes on welfare are a little bit
    ashamed, so they don't talk about it. Seniors whose assets are
    taken are usually cognitively impaired, or somewhat
    intimidated, because they would like to give something to their
    children. They don't talk.
        Medicaid planners can easily hide from scrutiny, because of
    the attorney-client privilege. And the other primary source we
    might have for information is nursing home staff or State
    Medicaid staff, and they can't talk. They are silenced by
    confidentiality. But despite these obstacles, it is quite
    possible to get the truth, and I have done many studies at both
    the national and State level which document that. We have
    provided a statement, and a list. Medicaid eligibility workers
    have told me in numerous States that upwards of 80 percent of
    everyone in long-term care paid for by Medicaid has done some
    form of asset divestiture or asset sheltering.
        So why don't we have more solid empirical evidence? I would
    submit to you that this is almost a conspiracy of ignorance.
    There is a distinct ideological bias among academics,
    foundations, and think tanks. The research money is controlled
    by people who promote public financing, but pooh pooh all of
    the private financing alternatives, and I would give as
    examples Georgetown, Kaiser, Robert Wood Johnson, Brookings,
    the Urban Institute. The conservative and libertarian think
    tanks, on the other hand, have mostly ignored Medicaid and
    long-term care to focus on Social Security and Medicare. And I
    see a real irony in this, because it seems to me that the left
    end of the political spectrum should be even more concerned
    about the abuse of Medicaid, for the simple reason that why
    would we use our scarce public welfare resources to indemnify
    the upper middle class heirs of affluent seniors, when they are
    all probably a bunch of Republicans anyway?
        What is the real problem here, because I just see Medicaid
    planning as the tip of the iceberg. The fundamental problem
    here is that--is not prosperous seniors taking advantage of
    Medicaid, or millionaires on Medicaid, as it is popular to
    portray in the media? The real problem is just regular folks
    are qualifying for Medicaid under the eligibility, which I will
    talk about in a minute, but I thought I would give you
    information on what was described to me as the average Medicaid
    planning client, in a study I did recently in Seattle.
        The average client has a home worth $250,000 to $400,000
    that they owned free and clear. They have got $150,000 to
    $200,000 in additional liquid assets, and $2,000 to $2,500 a
    month in income. Now, I don't think any of us would call that
    rich or wealthy, but it is the straw that can break the camel's
    back of Medicaid when we expand the social safety net to
    include folks at that level. But the fundamental problem with
    Medicaid is that the average person, in terms of income and
    assets, walks right on. There is no limit on how much income
    you can have, as long as your medical expenses, including
    nursing home care, are high enough. All you really need is a
    cash-flow problem, and that is critical, because there is no
    limit on how much you can have in assets, as long as you hold
    them in the exempt form, such as a home and all contiguous
    property, a business, including the capital and cash-flow, home
    furnishings, exempt cars, prepaid burials, you could go on and
    on, and I have in many number of reports.
        I would like to change now over to who gets hurt by the
    current system? Well, most of all, it is poor people. They
    don't have the key money that Medicaid planners advise their
    well-to-do clients to retain in order to get into the nicest
    facilities. Poor people don't have key money, so they are the
    ones that end up in the less attractive Medicaid facilities,
    and they don't get the home and community-based services that
    Medicaid has such difficulty providing.
        The general public gets hurt, because they have
    anesthetized to the risk of long-term care, as Dr. Burgess
    said. Nursing homes and other long-term care providers get the
    short end of the stick here, because of the notoriously low
    long-term care reimbursements through Medicaid. I don't have to
    tell you legislators are getting caught in the vise. Insurers
    and reverse mortgage lenders have no market for their product
    because people can ignore the risk, avoid the premiums, wait
    until they get sick, and the government will pay.
        Mr. Deal. Mr. Moses, would you summarize for us.
        Mr. Moses. I certainly shall.
        Mr. Deal. Okay.
        Mr. Moses. I just wanted to finish by saying what needs to
    be done. We have to stop using Medicaid as inheritance
    insurance for the baby boom generation. We have been pumping
    that anesthesia into the system for 40 years, and it has been
    very successful in putting people to sleep about this risk. We
    need to target Medicaid to the genuinely needy, and encourage
    everyone else with positive and negative incentives to either--
    to plan early and save, invest, or insure. This isn't
    complicated. Our problems with Medicaid and long-term are
    caused by well-intentioned but perversely counterproductive
    public policy. If we stop doing what we have always done, we
    will get a different result, and that is very definition of
    sanity.
        Thank you.
        [The prepared statement of Stephen A. Moses follows:]

    Prepared Statement of Stephen A. Moses, President, Center for Long-Term
                                 Care Financing

        Mr. Chairman and members of the Committee: thank you for inviting
    me to speak with you about the critical subjects of Medicaid and long-
    term care financing.
        My brief remarks today are fully developed and documented in
    reports published on our website at www.centerltc.org .
        If the question is ``Who should pay for long-term care?,'' the
    average person will answer ``Anybody but me.'' Denial is commonplace.
        Next best, people say ``Everyone should pay.'' Hence, we see a
    tendency to pass the financing burden on to government.
        Finally, if nothing else works, most people will prepare to pay
    their own way. That's when they turn to private savings, investments,
    home equity or insurance.
        Winston Churchill said ``You can trust the Americans to do the
    right thing, but only after they've tried everything else first.''
        So, let's ask: What have we tried already in long-term care
    financing? That is, who does pay for long-term care and what have been
    the consequences?
        Answer: the vast majority of all formal long-term care services are
    financed by government.
        Although Medicaid pays only half the dollars for nursing home care,
    it covers two-thirds of nursing home residents and touches nearly 80
    percent of all patient days with its notoriously low reimbursement
    rates.
        Even the so-called ``out-of-pocket'' expenditures for nursing home
    care--which are down from 39 percent to 25 percent in the past 15
    years--come mostly from Social Security benefits that Medicaid
    recipients have to contribute toward their cost of care.
        At 13 percent, Medicare is a much larger payer for nursing home
    care than most people realize.
        For home care, only 18 percent of the costs are paid by patients.
    The rest comes primarily from Medicare and Medicaid.
        Now, what has this heavy dependency on public financing of long-
    term care achieved?
        We have a severely dysfunctional, welfare-financed, nursing-home-
    based long-term care system that serves no one well, least of all the
    poor.
        Long-term care today is plagued by institutional bias, too little
    home and community-based care, bankruptcies, inadequate revenue, a
    dearth of capital, staff shortages, access and quality problems, huge
    tort liability, unaffordable liability insurance, too few full-pay
    private payers and too many low-pay Medicaid recipients.
        How in the world did we get into such a mess?
        In 1965, Medicaid came along and started paying for nursing home
    care.
        The nursing home industry saw a huge new source of revenue and
    naturally built more facilities as fast as they could raise the walls.
        The public figured nursing home care was free, so why pay out of
    pocket for home care or insurance?
        That's how institutional bias began and that's why a market for
    home care, assisted living and long-term care insurance did not begin
    to develop until decades later.
        Before long, of course, Medicaid nursing home costs exploded.
        Figuring, ``they can't charge us for a bed that doesn't exist,''
    government capped the supply of nursing home beds by requiring
    certificates of need (CONs).
        But capping supply only drove up the price as nursing homes raised
    their rates to compensate. So Medicaid capped what it would pay for
    nursing home care.
        In turn, nursing homes raised rates for private payers to make up
    the difference. That was the origin of ``cost shifting'' from Medicaid
    to private payers.
        Over time, Medicaid nursing home census grew and private pay census
    declined, as fewer people could afford the higher private pay rates and
    Medicaid eligibility became easier and easier to obtain.
        A new practice of law--Medicaid estate planning--evolved to
    impoverish people artificially so they could qualify for Medicaid
    without spending down.
        But the average person in terms of income and assets could qualify
    for Medicaid even without such legal machinations because of the
    program's generous eligibility criteria.
        With supply and price capped and eligibility easier and easier to
    obtain, nursing homes could fill their beds by accepting Medicaid's low
    rates almost without regard to the quality of care they offered.
        Thus arose the access and quality problems that led to heavy
    government regulation of nursing facilities.
        Today, nursing homes are caught between the rock of inadequate
    reimbursement and the hard place of quality regulation.
        Or, as I've heard industry executives express it: ``the government
    expects Ritz Carlton care for Motel 6 rates while imposing a regulatory
    Jihad.''
        In the meantime, both Medicaid and Medicare have played a growing
    role in financing home care, which most people prefer, but which those
    programs cannot afford.
        The result is that the public has been anesthetized to the risk of
    long-term care even as state and federal coffers have been emptied by
    government's efforts to help.
        It's the same old story: good intentions led to unforeseen
    consequences.
        That brings us to the most important question to ask: who WILL pay
    for long-term care in the future?
        Certainly not government. That well is dry. No one is so naive
    anymore as to expect a new publicly financed long-term care system to
    come along.
        More and more, the hard reality is true: if you want access to
    quality long-term care at home or in the community, you must be able to
    pay privately for it.
        As publicly financed long-term care continues to deteriorate, more
    and more people will turn to their home equity as the only way to pay
    for acceptable care.
        Eighty percent of seniors own their homes and 73 percent of those
    own them free and clear. Nearly $2 trillion is available and easily
    accessible through home equity conversion, while still allowing
    borrowers to retain the use of their homes.
        When the only choice becomes ``inadequate welfare-financed long-
    term care or spend down your home equity to get quality care,'' more
    people will turn sooner to private insurance as a viable alternative.
        With more people insured and paying privately at market rates, care
    choices and quality will improve for everyone, rich and poor alike.
        With fewer people dependent on Medicaid, the welfare program will
    be better able to provide a wider range of higher quality care to the
    genuinely needy.
        We will get to that point by default simply by staying on the
    current course, but many people will be hurt.
        Or, we can remove the perverse incentives in public policy that
    currently trap people on Medicaid.
        The single most important step to take is to stop using Medicaid as
    inheritance insurance for the baby boom generation.
        We need to tighten eligibility, require spend down of illiquid home
    equity as a condition of eligibility, and enforce estate recovery
    requirements.
        When the choice is ``pay me now or pay me later,'' as in the old
    Fram oil filter commercial, most people will save, invest or insure for
    long-term care and everyone will be better off.
        Thank you for your attention. I'll try to answer any questions you
    may have.

        Mr. Deal. Thank you. Well, we made it a little over halfway
    through the panel before we had to go vote again. If you will
    excuse us again, we are going to go vote, but we will be back
    shortly. We will stand in recess, pending these votes.
        [Brief recess.]
        Mr. Deal. We have been given permission to go ahead without
    anyone else. They will be here. They will be coming in. I
    apologize to you. Mr. Krooks pointed out to me that you don't
    have a timer down there. We normally have a timer that lets you
    know when you have a minute left. I apologize for that. And I
    know it would be rude to turn over your shoulder and look at
    the clock, which I am looking at, which is behind you there. So
    I will try to maybe give you the high sign when you are close
    to the time limit. Mr. Krooks, we will start with you.

                     STATEMENT OF BERNARD A. KROOKS

        Mr. Krooks. Thank you, Mr. Chairman. I just want to point
    out that in addition to being here as a practicing attorney
    with the firm Littman Krooks, I am also here as a past
    President of the National Academy of Elder Law Attorneys, which
    is a national not for profit association, which provides
    information, education, networking, and assistance to lawyers,
    bar associations, and others, who deal with legal services to
    the elderly and people with special needs. And I want to thank
    you for the opportunity to testify before you today.
        Let me just start out by saying that the problem is the
    United States does not have a comprehensive system for long-
    term care. We discriminate in our delivery of healthcare based
    on the type of illness one has. If you have an illness like
    heart disease or cancer, the United States provides
    comprehensive care through Medicare. If you have a chronic
    illness, like Parkinson's disease, ALS, otherwise known as Lou
    Gehrig's disease, Alzheimer's disease, or multiple sclerosis,
    the government doesn't help you unless you impoverish yourself
    and then first qualify for Medicaid.
        Most families needing long-term care feel defeated by
    having to apply for a welfare program after years of working
    and saving. Many are children of the Great Depression, and are
    World War II veterans. Many are women, who after losing their
    husbands to the devastation of a chronic illness have to suffer
    the indignity of impoverishment and financial dependence on
    family or government. The bottom line is that our healthcare
    system penalizes people who have pursued the American dream,
    who have saved for retirement, and then get the wrong disease.
        Clients don't come to me seeking Medicaid. That is a myth.
    Medicaid is the payer of last resort. People want the best
    quality of care for a loved one. They want to receive care at
    home, as we have heard numerous times today. They want to avoid
    impoverishing the community spouse. They want to avoid losing
    the family home. Providing a legacy for children or
    grandchildren is low on the list. Seniors engage in long-term
    care planning mainly because they find themselves in a lose-
    lose situation. First, they lose their health and need long-
    term care, and then, they come face to face with nursing home
    costs that average over $70,000 annually. Second, they learn
    that they will have to lose virtually their entire estate to
    pay for this long-term care.
        Another myth is that millionaires are going on Medicaid.
    The fact is millionaires cannot and are not on Medicaid. They
    cannot go on Medicaid. They don't need Medicaid. Most can
    afford the much-preferred home care, even on a 24 hour basis.
    In fact, many would face potentially large capital gains and
    gift taxes if they were to transfer their assets. Moreover,
    seniors are just not comfortable giving up control of their
    assets. Transferring assets and impoverishing themselves is not
    something they want to do. When a client comes to see me, and
    the client has significant assets, I suggest they consider
    seeing a professional who is able to provide information
    regarding their long-term care insurance options.
        Proposals have been put on the table that will make
    Medicaid asset transfer penalties more punitive, and will
    mainly hurt seniors who act in good faith, yet fall innocently
    into the budget cutting process. One proposal to make penalties
    harsher calls for changing the start of the penalty period from
    the date of transfer to the date one applies for Medicaid. This
    has the practical effect of extending the penalty period for
    years beyond what it is now.
        A few of the likely victims of such measures include a
    grandparent caring for a grandchild who provides savings to
    help pay for the grandchild's education, a devoted church
    supporter who devotes substantial time to his church and
    donates personal assets to the church, the widow who lacks
    records of her now-deceased husband's spending, the caring
    sister who uses savings to help a needy sister remain at home.
    Under the proposals to tighten transfer of asset rules, each of
    these individuals would be cutoff Medicaid if they subsequently
    get sick and need long-term care.
        I would like to give you a couple of examples of how the
    new proposals would work if enacted. There are many more
    examples contained in my written testimony. Let us take the
    case of Mr. Banks. Mr. Banks is living independently, and has a
    pretty active life, although he does suffer from diabetes and
    heart disease. He sold his house, his only asset, for $135,000,
    and he donated 10 percent of the proceeds to his local charity.
    Mr. Banks moved to assisted living, and thereafter, his
    condition deteriorated, and he had to go to a nursing home. Two
    years later, Mr. Banks had spent his entire savings on the cost
    of his care, did not make any transfers, and he would otherwise
    be eligible for Medicaid, but for this $13,500 gift, the 10
    percent of the $135,000 house that he sold, that he made 2
    years ago. Under the new proposal, the penalty period
    attributable to that gift would not start until he applied for
    Medicaid 2 years later. Under current law, the penalty would
    have long expired.
        Let me give you another example, again, so you can see how
    these new rules work, if they were enacted. Let us take the
    case of a mother who helps her two children. Her daughter has
    medical problems, and does not have insurance, and her son's
    daughter, her grandchild, is in college with expensive tuition.
    So she helps her daughter by paying $30,000 for healthcare. She
    is uninsured. And she helps her granddaughter by paying $50,000
    in tuition. These are significant amounts paid almost 5 years
    before she was forced to go into a nursing home. With a 5-year
    lookback, which is proposed under the administration's budget,
    and a penalty period starting on the day of application, she
    will be ineligible for nursing home care for more than 17
    months. Now, that number fluctuates depending upon the State
    regional divisor, but seniors will not be able to help out
    family members, because they will not be able to predict their
    future. This is a case where 5 years earlier, she helped out a
    grandchild with college education expenses and with healthcare
    expenses for a daughter, and then she is penalized for a year
    and a half when she goes into a nursing home 5 years later.
    These are just a couple of the many examples, and the types of
    people who will be hurt under these proposals.
        Mr. Chairman, I thank you for the opportunity to present
    testimony to this distinguished panel that has done so much for
    the elderly and individuals with disabilities over the years.
    As you can see from my remarks, one's life can truly end up on
    a Wheel of Fortune or misfortune. You spin the wheel, and if it
    lands on heart disease or cancer, your costs are covered. If it
    lands on Lou Gehrig's disease, multiple sclerosis, or
    Alzheimer's disease, you are on your own. If you get the right
    illness, the government will pay. If you get the wrong illness,
    they will not. Unfortunately, none of us has any control over
    which illnesses we contract.
        I would be happy to respond to any questions you may have.
    Thank you.
        [The prepared statement of Bernard A. Krooks follows:]

       Prepared Statement of Bernard A. Krooks, Past President, National
                         Academy of Elder Law Attorneys

        Good morning. Chairman Deal and Ranking Minority Member Brown, I
    congratulate you on calling this hearing. I appreciate the opportunity
    to testify as a professional serving the elderly and individuals with
    disabilities and as a past president of the National Academy of Elder
    Law Attorneys (NAELA). Thank you for your openness to our experiences
    and ideas as you consider the complex issues of long-term care and
    Medicaid.
        The National Academy of Elder Law Attorneys is a national, non-
    profit association composed of more than 4800 attorneys. NAELA provides
    information, education, networking, and assistance to lawyers, bar
    organizations, and others who deal with the many specialized issues
    involved with legal services to the elderly and people with special
    needs.

    Elder Law
        My professional practice is devoted to assisting seniors and others
    with disabilities. Elder law is a specialized area of law that involves
    representing, counseling, and assisting elderly and individuals with
    disabilities and their families in connection with a variety of legal
    issues. It is a holistic approach to the practice of law that focuses
    on the individual rather than a particular area of law. I have included
    at the end of my statement a list of the areas in which elder law
    attorneys provide support to older and disabled persons. I hope that it
    gives you a good picture of the range of concerns we help our clients
    work through, such as wills, advance directives, trusts, guardianships,
    government benefits, and long-term care insurance.

    The Long-Term Care System
        Mr. Chairman, as I am sure you know, unpaid caregivers provide the
    majority of long-term care in the United States. Researchers estimate
    the value of this unpaid caregiving at well over $196 billion per
    year.1 By contrast, paid caregiving costs the public and
    private sectors about $173 billion,2 more than a quarter of
    which is paid out-of-pocket by individuals and their families. Nursing
    home care costs approximately $70,000 per year on average, with 36% of
    that paid out-of-pocket by individuals and their families. It is in
    this context that families needing long-term care services engage in
    financial planning to pay for those services.
    ---------------------------------------------------------------------------
        \1\ Peter S. Arno et al., ``The Economic Value of Informal
    Caregiving,'' 18 Health Affairs 182 (March/April 1999) (estimates for
    1997).;
        \2\ Health Policy Institute, Georgetown University, Long-Term Care
    Financing Project, Fact Sheet: Who Pays for Long-Term Care? (May 2003),
    available at: http://ltc.georgetown.edu/pdfs/whopays.pdf, accessed July
    31, 2003.
    ---------------------------------------------------------------------------
        The United States does not have a national health insurance program
    and it does not have a comprehensive long-term care system. Based on
    the experiences of NAELA's members with thousands of older clients and
    clients with disabilities, we support a national long-term care system
    that would provide comprehensive services, including home and
    community-based and institutional services, to people with serious
    physical and cognitive impairments. However, until a comprehensive
    long-term care system for all Americans is in place, it is essential
    for Medicaid to continue its role as a federal-state program and
    continue to help pay for the long-term care needs of low and middle-
    income older individuals and individuals with disabilities.
        When the Medicare bill was signed into law, President Johnson was
    clear about our commitment to protect older Americans. He said:
              No longer will older Americans be denied the healing miracle
            of modern medicine. No longer will illness crush and destroy
            the savings that they have so carefully put away over a
            lifetime, so that they might enjoy dignity in their later
            years. No longer will young families see their own incomes and
            their own hopes, eaten way simply because they are carrying out
            their deep moral obligations to their parents.
        Unfortunately, this goal of Medicare remains unfulfilled for many
    Americans with chronic illnesses. If someone is acutely ill, there is a
    chance that he or she could get better. For example, someone with heart
    disease could have bypass surgery and be fully recovered. However, if
    someone has a chronic illness, there is no reasonable expectation of
    recovery. For example, someone who has Alzheimer's disease can never
    fully recover. As we know, Alzheimer's disease can be a long journey
    for the victim as well as the caregivers and other family members. A
    person can survive a decade or more before ultimately succumbing to the
    ravages of this disease.
        We discriminate in our delivery of health care based on the type of
    illness one has. If you have an illness like heart disease or cancer,
    the United States provides comprehensive care through Medicare. If you
    have a chronic illness like Alzheimer's disease, Parkinson's, ALS (Lou
    Gehrig's disease), or Multiple Sclerosis, the government doesn't help
    unless you impoverish yourself first and qualify for Medicaid.
        Most families needing long-term care feel defeated by having to
    apply for a ``welfare'' program after years of working and saving. A
    colleague of mine from Illinois recently stated that most middle-income
    seniors who turn to Medicaid for nursing home care are ``people who are
    up against a wall because of a serious illness, who have never depended
    on a government handout in their lives.'' Many are children of the
    Great Depression and are World War II veterans, our so-called
    ``greatest generation.'' Most of them are women, who, after losing
    their husbands to the devastation of chronic illness, have to suffer
    the indignity of impoverishment and financial dependence on family or
    the government.
        The bottom line is that our health care system penalizes people who
    have pursued the American dream, saved for retirement, and then get the
    wrong disease.

    What I Do--Who Comes to Me and Why
        When I do long-term care planning it is a part of a larger planning
    process that:

     Examines the full range of long-term care options, issues and costs
            relevant to the client's circumstances;
     Pursues the goals of preserving and promoting the individual's
            dignity, self determination, and quality of life; and
     Respects the individual's fundamental values and preferences as
            defined by the client.
        It is a rare day when I spend most of my time counseling clients
    well in advance of the long-term care crisis. Most often, the lawyer's
    help is sought when the need for long-term care has already arrived. It
    usually involves spouses and children of persons needing nursing home
    care who have already been heavily invested in providing care to the
    person for an extended period.
        My clients' goals, in order of priority, typically consist of:

     Finding the best quality of health care for their loved one
     Supplementing the Medicaid personal needs allowance (typically $30 to
            $50 per month in most states);
     Paying for non-covered Medicaid services and needs (e.g., dental
            care, hearing aides, eyeglasses, private duty nurse, clothing,
            books, flowers, etc.);
     If a couple, ensuring the financial security of the community spouse
            (CS);
     Avoiding burdening the family;
     Avoiding losing one's home (Medicaid liens and recover); and
     Providing a modest legacy for the children (while the estate tax is
            being eliminated for well-off families, states are ramping up
            Medicaid estate recovery--the estate tax on the disabled).
        Mr. Chairman, please keep in mind that when people do become
    eligible for Medicaid, regardless of whether they have engaged in long-
    term care planning, they must pay all but a small portion of their
    income each month for their care. Medicaid then pays whatever the
    difference is between that amount and the Medicaid rate. Thus, costs to
    Medicaid are always mitigated by the Medicaid recipient's monthly
    income.
        In some cases, married couples are faced with having to consider
    divorce when one spouse requires long-term care in a nursing home, or
    else face financial ruin. Clients are emotionally devastated by the
    necessity to make the decision to go this route at a time when they are
    most vulnerable. For a society that professes to support the
    institution of marriage, this is a sad and desperate situation.

    Who Doesn't Come to Me for Help with Medicaid and Why
        Millionaires do not go on Medicaid. They don't need Medicaid. Most
    can afford the much-preferred home care, even on a 24-hour basis. Most
    would face potentially large capital gains taxes, loss of step-up
    basis, and gift taxes if they engaged in transfer strategies. Those
    with retirement plans often face significant taxes if they liquidate
    the plan prior to death. Tax planning is usually antithetical to
    Medicaid planning.
        Rather, millionaires have other options available to them--
    including long-term care insurance and tax planning. They have no need
    to rely on Medicaid, nor would they want to. Medicaid is a valuable
    program, but there are many disadvantages to relying on Medicaid--such
    as limitations in access to health care providers, limitations in
    coverage, exposure to recovery against one's estate after death, and
    state-by-state variations in eligibility and coverage.
        No one yearns to be on a program like Medicaid. It is rare for a
    senior to come in to my office and say ``I want to give away my money
    so I can go on Medicaid.'' Seniors engage in long-term care planning
    mainly because they find themselves in a ``lose-lose'' situation.
    First, they lose their health and need long-term care and come face to
    face with nursing home costs now averaging approximately $70,000 per
    year. Second, they learn that they will have to lose virtually their
    entire estate to pay for long-term care --paying 100% out-of-pocket
    until they reach Medicaid's definition of impoverishment.

    Medicaid Proposed Changes--Punitive or Positive?
        Over the years, the Congress has enacted provisions to balance the
    welfare entitlement focus of the Medicaid program with the reality that
    middle-income Americans have few other options for long-term care. The
    transfer of asset rules are well designed for accomplishing a balance
    between the needs of individuals and families with that of fiscal
    responsibility. The transfer of asset rules include such provisions as:

     Individuals must postpone Medicaid eligibility if they give away
            assets;
     Only gifts from the recent past (3 years) are looked at, because they
            are the most likely to have been done with any thought of
            Medicaid eligibility;
     The penalty starts when the individual gave the money away because
            that is when the individual would have had it and could have
            used it for his or her care;
     Transfers of certain assets and transfers to certain individuals are
            protected from penalties because public policy should not
            promote or foster homelessness or financial dependency on the
            government by those whose loved ones need Medicaid; and
     Estate recovery exists so that states can be reimbursed for the
            monies they have spent to care for the individual on Medicaid
            in a nursing home.
        This debate should also acknowledge the significant financial
    crisis faced by a couple when one requires long-term care. For example,
    by enacting the Medicare Catastrophic Coverage Act of 1988, amended in
    1989, we have adopted a national public policy to provide a modest
    degree of financial security to the spouse of an individual who
    requires long-term care. Through this policy, we have enabled the
    spouses of individuals who require long-term care services to continue
    their relationship rather than be forced to choose between poverty and
    divorce. This will change with the proposals Congress is presently
    considering.
        Making asset transfer penalties more punitive will mainly hurt
    seniors who act in good faith yet fall innocently into the State budget
    cutting process. One proposal to make penalties harsher calls for
    changing the start of the penalty period from the date of transfers to
    the date one applies for Medicaid. This has the practical effect of
    extending the penalty period for years beyond what it is now. A few of
    the likely victims of such measures are: the grandparent caring for a
    grandchild who provides savings to help pay for the grandchild's
    education; the devoted church supporter who donates personal assets to
    the church; the widow who lacks records of her now deceased husband's
    spending; the caring sister who uses savings to help a needy sister
    remain in her home. Under the proposals to close transfer of asset
    rules, each of these individuals will be cut off Medicaid if they
    subsequently get sick and need long-term care.

    What Will Happen if You Change the Start Date of the Penalty Period?
    Medicaid: Penalty Rule Computation

    I. Current Law Concerning Penalty for Asset Transfers of Less than Fair
            Market Value:
        The penalty period commences on the first day of the month
    following the month in which the transfer was made or the first day of
    the month in which the transfer is made, at the state's option.

    II. Proposed Legislation:
        Under the President's Proposed Budget, the penalty period would
    commence on the date of the transfer or the first day of the month
    during or after which a Medicaid application has been made, whichever
    is later.

    III. Analysis and Issues
    1. Under this proposal, seniors and people with disabilities denied
            Medicaid would, at the time of the denial, be impoverished,
            have physical and/or mental impairments so severe they could no
            longer care for themselves, be in need of nursing home or home
            care, and have no other means (private insurance or Medicare)
            of paying for care.
    2. The denial of long-term care will trigger adverse medical
            consequences. The absence of skilled nursing, physical,
            occupational and speech therapy and necessary assistance with
            medical care and activities of daily living will adversely
            affect seniors and people with disabilities who will be denied
            home care and nursing home admission under this proposal.
    3. The harsh penalty that would be created by this proposal would be
            applied to all those who are unable to immediately recover the
            funds or the value of property alleged to have been improperly
            transferred prior to the Medicaid application. Most transferees
            will have no legal obligation to refund the transfer. In other
            cases, transferees will be financially unable to make any
            refund or there will be no transferee from whom to recover. For
            example, a senior with Alzheimer's who made a $3,000 withdrawal
            from her savings account thirty six (36) months prior to the
            Medicaid application would be ineligible for Medicaid long term
            care benefits for a portion of the month in which she applies.
            The nursing home or hospital will not be paid for care
            provided.
    4. This proposal would discourage donations to charities, religious and
            political organizations and candidates for government office.
            Only those who can predict with absolute certainty that they
            will not need Medicaid for at least three years could safely
            make donations.
    5. This proposal will harm families by inhibiting older members from
            providing financial assistance to younger members--with such
            things as down payments on homes and college tuition--out of
            fear that they may not qualify for Medicaid nursing home care
            if unforeseen events leave them unable to care for themselves.
    6. In addition to the harm to seniors and those with disabilities,
            there would be considerable financial harm to health care
            providers. Hospitals and nursing homes are prohibited from
            discharging patients unless suitable alternative arrangements
            can be made, even if it means providing extended uncompensated
            care.
    7. In cases where the nursing home admission has already occurred and
            the penalty is applied, nursing homes will be required to
            provide uncompensated care for the duration of the penalty
            period or until hospitalization. Nursing homes would become
            financially strapped--influencing staffing levels and the
            quality of care for all residents.
    8. Those in hospitals at the time of the denial would be unable to
            leave since nursing homes and home care agencies will deny
            admission if there is no source of payment. Hospitals will
            become the default providers of care as access to nursing homes
            is barred during the penalty period. The cost of hospital care
            to the government will be far higher than it would have been in
            long-term care.
    9. This proposal will most likely not harm those who set out to ``game
            the system'' because they most likely will be able to learn how
            to circumvent it, while those who have no such intent will
            likely learn of the policy long after it is too late. In fact,
            this proposal may encourage more and earlier transfers, while
            it is unclear how this proposal encourages the purchase of long
            term care insurance, especially because some of those people
            are uninsurable.
    10. Most long-term care is provided by informal caregivers (e.g. family
            members). This change could also have far-reaching economic
            effects if a family member has to leave his or her job to try
            to take care of a severely incapacitated elder.

    What Will Happen if You Extend the Lookback Period?
    Medicaid: Lookback Period

    I. Current Law Concerning the Medicaid Lookback Period
        Federal law (42U.S.C 1396p(c)) requires states to withhold payment
    for various long-term care services for individuals who dispose of
    assets for less than fair market value. The term assets includes both
    resources and income. The lookback period for both institutional care
    and home and community based waiver services is 36 months, except the
    lookback period for trust-related transfers is currently 60 months.

    II. Proposed Legislation to Extend the Medicaid Lookback Period to Five
            Years
        The budget bill may include a proposal to change the lookback
    period to 60 months for institutional care and home care, regardless of
    whether there have been trust-related transfers.

    III. Analysis and Issues
    1. The proposal will create unacceptable new obstacles for vulnerable,
            frail elderly individuals and persons with disabilities to get
            care, because the proposal will require record keeping and
            documentation that is far beyond the normal practices of the
            elderly, especially poor and chronically ill elders. Therefore,
            low-income elders would be denied admission to a nursing home
            because of inadequate record keeping.
    2. Medicaid recipients who already receive home care services under the
            current law could lose eligibility under the proposed changes
            if they had made transfers within the past five years. Services
            could be abruptly terminated; thereby placing the elderly
            individual at risk of serious harm and inadequate or
            inappropriate care in the community.
    3. The harshest impact of this proposal will be on those applicants
            with dementia, who will not be able to provide documentation or
            recollection for transfers, regardless of how small.
    4. The extension of the lookback period is arbitrary and without sound
            reasoning, other than to look for transfers in order to keep
            seniors from accessing Medicaid for nursing home care (while
            increasing administrative costs). The current federal law uses
            three years, which is a sufficient and reasonable time period
            to assume that any transfers made were not in contemplation of
            a future event. The average stay in a nursing home is less than
            three years. Hence, under current law, most seniors with more
            significant assets who transfer assets at the onset of needing
            long-term care in a nursing home will not receive Medicaid
            reimbursed nursing home care.
    5. Any increase in the lookback period will have a significant impact
            on administrative overhead and be more burdensome on frail
            elderly, who must search and obtain records of proof for older
            transactions. How will the frail elderly (especially those with
            dementia) do this from a nursing home bed?
    6. The proposal suggests that the elderly can predict their medical and
            financial circumstances five years into the future. An extended
            lookback coupled with a change in the transfer rules will
            punish unwitting elders who have helped their families with
            commonly made gifts and then experience medical events such as
            a stroke, hip fracture or Alzheimer's disease.
    7. There is no reliable data to support the proposition that a longer
            lookback period will reduce the Medicaid program's share of
            nursing home care costs.
    Examples of How the Proposed Legislation Will Affect the Elderly
        Mr. Chairman, I have provided for the Subcommittee's consideration
    ``typical examples'' of how these proposals will hurt real Americans
    and their families.
    1. A church supporter
        Mr. Banks was living independently and actively in Florida though
    he suffered from diabetes and heart disease. He sold his home for
    $135,000 and donated 10% of the proceeds, or $13,500, to his local
    church. Mr. Banks moved to assisted living and thereafter to a skilled
    nursing facility. Two years later, Mr. Banks had exhausted his funds
    and would otherwise be eligible for Medicaid but for this $13,500 gift
    to his church. Instead, Mr. Banks is ineligible for assistance for four
    months and has no resources to pay for his care during that period.
    Under existing law, Mr. Banks would have been penalized when he made
    the $13,500 gift and that penalty period would have elapsed long before
    his need for public assistance arose.
    2. A grandparent caregiver
        Mr. and Mrs. Brown are the primary caregivers for their 16-year-old
    grandchild. Over the last three years they have paid $20,000 for
    support of their grandchild. Mr. Brown suffers a stroke and needs long
    term care. Mrs. Brown has total liquid assets of $50,000. Mr. Brown is
    otherwise eligible but will not be approved for Medicaid because of the
    $20,000 expenditure for his grandchild. Instead, Mrs. Brown will be
    placed in the precarious position of paying privately for six months
    that will, at today's costs, totally exhaust her $50,000 nest egg.
    3. A family emergency
        Mrs. Jones' daughter loses her job due to chronic fatigue syndrome.
    The daughter is a single parent with two underage children. Mrs. Jones
    helps her daughter financially in amounts totaling $30,000. Six months
    later, Mrs. Jones suffers a heart attack and a debilitating stroke
    requiring long-term care. Two years later an impoverished Mrs. Jones
    applies for Medicaid and is denied because of the $30,000 gift made
    several years earlier.
    4. Cash-based couple
        Mr. and Mrs. Smith live in their own home and pay most of their
    day-to-day expenses with cash. Mr. Smith generally withdraws about $500
    per month for food, gas, newspapers, house wares, car repairs, etc.
    Generally, he does not keep receipts, at least not in any organized
    way. Mrs. Smith has never handled their financial affairs and suffers
    from mild dementia. Unexpectedly, Mr. Smith suffers a stroke and now
    needs nursing home care. Their current assets and income would make him
    eligible for Medicaid coverage without difficulty under current law.
        His withdrawals of $500 per month will result in a penalty period,
    unless they are accounted for. His withdrawals add up to $6000 per year
    in potentially disqualifying transfers, or $18,000 for the three-year
    lookback. Since Mrs. Smith cannot document the use of the withdrawn
    money, Mr. Smith will face a penalty period of approximately 4 months.
    ($18,000  $4,500/mo (average regional nursing home rate) = 4 month).
    7. A helper through hard times
        Mr. T, age 80, has been ill for several years since a stroke. His
    wife, age 75, has been caring for him at home. He became more seriously
    impaired this past summer when he contracted pneumonia. He was walking
    with assistance before the pneumonia, but increasing weakness has left
    him unable to walk. She is continuing to care for him at home, but
    nursing home placement looks imminent.
        Mrs. T has a son from a previous marriage who lives in another
    state and is not well off. During the last half of 2001, Mrs. T paid
    his mortgage for him, at $850 per month ($5,100 total). In May of 2002,
    she gave him $2,200 to help him purchase an automobile so he could
    commute to and from a new job.
        Thus, her total transfers were $7,300. Their own savings are now
    dwindling. Her husband will be otherwise eligible for Medicaid, but
    under the waiver proposal, he will face a penalty period of one month
    and some days. Mrs. T will have to find a way to pay this out of
    pocket.
    8. A caring sister
        Two sisters, both in their 80s, have lived with each other in an
    apartment for several years. Both have reasonably sufficient assets to
    cover their anticipated needs. However, one sister has considerably
    more assets (about $250,000). She is concerned that if she were to
    become ill and leave the apartment to move into a nursing home, the
    sister with fewer assts would not be able to afford to remain in the
    apartment.
        The sister with greater assets wishes to take steps to ensure that
    her sister will be able to continue living in the apartment, if
    possible, and so she funds an irrevocable trust with $48,000, intended
    to supplement the poorer sister's costs of living if the need arises.
        Under current law and a regional monthly transfer rate of $4500,
    this transfer will result in a disqualifying period of a little over
    ten months ($48,000  $4500/mo = 10.67 months) from the date of
    transfer. But under the proposal, the caring sister, after spending
    down all her assets on nursing home care, would then face a penalty
    period of more than ten months before receiving Medicaid nursing home
    coverage. Alternatively, if she is aware of the penalty rules, she may
    be reluctant to help her less fortunate sister in the first place.
    9. Helping family
        A mother helps her two children--her daughter has medical problems
    and does not have insurance and her son's daughter (her grandchild) is
    in a college with expensive tuition. So she helps her daughter by
    paying $30,000 for health care and she helps her granddaughter by
    paying $50,000 in tuition. These are significant amounts paid almost
    five years before she was forced to go into a nursing home. With a five
    year lookback and a penalty period starting on the day of application,
    she will be ineligible for nursing home care for more than 17 months
    (depending upon the state's regional monthly transfer rate). Seniors
    will not be able to help family members because they will not be able
    to predict their circumstances.
    10. A widow lacking records
        Mrs. Waters was married for fifty years. Prior to his death, Mr.
    Waters handled all financial transactions. Mrs. Waters suffers from
    dementia and upon Mr. Waters' death is placed in a skilled nursing
    facility. Her resources are expended and she is applying for Medicaid.
    She has no knowledge or ability to explain the cash withdrawals
    totaling $50,000 during the five years preceding her husband's death.
    Nonetheless, Mrs. Waters is ineligible for Medicaid due to these
    inexplicable transfers.
    11. A mother helping her daughter
        Mr. and Mrs. G are in their late seventies and retired. Two and a
    half years ago, they were living independently and relatively healthy.
    At that point, one of their daughter's marriage ended and the daughter
    moved closer to her parents to be near them. She was unemployed at the
    time and needed to work. Her parents bought her a modest car for
    $18,000 so that she had transportation to get back and forth to work.
    The daughter then started working in a series of part-time jobs, which
    provided her just enough to meet her living expenses.
        Two years after giving their daughter the car, Mr. G suffered a
    major stroke. He lost his ability to speak, walk and use his left arm.
    He received rehabilitation following the stroke but did not recover all
    of his abilities. Despite medical advice, his wife insisted on bringing
    him home. She cared for him herself and paid for services privately for
    one year. At that point, Mr. G's needs had increased and Mrs. G had
    become considerably weakened due to the demands of being the primary
    caregiver. They reluctantly decided that he would be best cared for in
    a skilled care facility. Mrs. G paid privately for this care for one
    year. By then, her assets were depleted and she had no more than the
    amount that would be protected for her as a community spouse. She
    applied for Medicaid benefits on behalf of her husband and was denied
    benefits due to the purchase of the car for their daughter.
    Long-Term Care Insurance
        Mr. Chairman, when a client comes to see me with significant
    resources, I suggest that they consider seeing a professional who is
    able to provide information on their long-term care insurance options.
    Congress and the Administration have for a number of years considered
    modifying the current laws regarding long-term care insurance. NAELA
    has consistently supported legislation that couples tax credits for
    long-term care caregivers with tax deductions for the premiums paid on
    the purchase of long-term care insurance. We believe this would be a
    positive way to assist caregivers and those that are willing, able, and
    qualify to purchase insurance.
        I frequently advise clients with sufficient assets to consider
    long-term care insurance. Elder law attorneys may be the single largest
    supporter of long-term care insurance as a serious option, with the
    exception of the insurance industry itself. In many cases, however, our
    clients cannot afford the products or do not meet the underwriting
    criteria and will not be able to buy it. Nonetheless, I refer many
    clients to long-term care insurance agents if they have the resources
    and might be approved for coverage.
        Some have wrongly claimed that the proposed changes to the asset
    rules will expand the use of long-term care insurance. NAELA does not
    believe this is true. However, NAELA strongly believes that long-term
    care insurance has a vital and appropriate role in helping to provide
    long-term care to some Americans and that we should continue to explore
    ways to make it a useful tool for more of us.
        NAELA and I also support the expansion of the Long-Term Care
    Insurance Partnership Program. I am aware that a number of Members of
    Congress and consumer groups have reservations about doing this, but I
    believe it is time to look carefully at this program and make any
    changes that are needed to make it a viable alternative in all states.
    The President has included this in his budget proposal and we believe
    your committee should help move this forward this year.

    Other Medicaid Budget Cuts
        Some believe that the solution to Medicaid's increasing costs lies
    in methods either to limit federal funding and/or offer states greater
    flexibility in the administration of the program. I do not believe
    either will succeed. Capped funding or a block grant approach may offer
    states short-term fiscal relief but result in long term financial
    disaster for them. Modification on a state-by-state basis of
    fundamental eligibility rules will destroy what uniformity the program
    does have and shred the safety net that we need so desperately for all
    of Medicaid's beneficiaries.
        Neither a limitation of federal funding nor a restriction in
    Medicaid's fundamental eligibility rules will change the fact that
    seniors and individuals with disabilities, their spouses and their
    families will continue to require basic health care. I hope this
    Congress does not allow a frail and vulnerable senior to suffer at home
    without treatment because we have restricted services or rewritten
    categorical eligibility rules that eliminate the senior from
    participation. Further, the Administration proposed that changing the
    Medicaid asset rules would save $4.5 billion. There is no research that
    supports this assumption. In fact, the limited research data available
    reveals that there is little to be gained by changing these rules and
    much harm to be done to the elderly and individuals with disabilities.
        Assuming that we have not become a society that turns its back on
    those in need, then these proposals accomplish nothing more than a
    shift of costs for the care that we should provide to those who are at
    risk. If federal funding for such services is limited, and the services
    continue, who will pay? At some level, whether by state, county,
    hospital, nursing home or private individual, the level of
    uncompensated care will increase. When that burden is borne by each
    state, hospital or nursing home, then the financial viability of each
    payer will be weakened further and the integrity of our health care
    system will be compromised.
        NAELA supports the efforts of Senators Smith and Bingaman and
    Representative Heather Wilson and many others who have worked to create
    a bipartisan Medicaid Commission that would take a thoughtful look at
    this critically important program and work to find innovative solutions
    to its problems. Please let good policy drive your actions, not the
    budget.

    Conclusion
        Mr. Chairman, I thank you for the opportunity to present testimony
    to this distinguished panel that has done so much for the elderly and
    individuals with disabilities over the years. As you can see from my
    remarks, one's life can truly end up on a Wheel of Fortune or
    misfortune. You spin the wheel and if it lands on heart disease or
    cancer, your costs are covered; if it lands on Lou Gehrig's disease,
    Multiple Sclerosis or Alzheimer's disease, you are on your own. If you
    get the right disease, the government will pay; if you get the wrong
    disease, they will not. Unfortunately, none of us has control over
    which illnesses we contract.
        I ask that even in these times of tight budgets that you continue
    the commitment that you have made to care for millions of Americans
    through the Medicaid program.
        Mr. Chairman and Members of the Subcommittee, I would be happy to
    respond to any questions you may have. Thank you.
    NAELA Members as Resources: Issue List
        The National Academy of Elder Law Attorneys' (NAELA) has members
    that are valuable public policy and substantive law resources. Within
    the membership we have expertise in almost all federal, state and local
    programs serving or affecting the elderly. Many are willing to be
    supportive of the work of legislators and regulators, and will provide
    expert opinions, testimony, articles, and other written materials upon
    request. Issue areas include, but are not limited to: Alternative
    Dispute Resolution; Disability Law; Estate Planning; Health Care
    Decision Making and End of Life Issues; Health Care Advanced
    Directives; Long-Term Care Planning; Long-Term Care Insurance; Managed
    Care; Medicare; Medicare Appeals; Medicaid; Mental Capacity Issues;
    Nursing Home Care, Law, and Litigation; Public Interest Representation
    (including Legal Services Corporation and Older Americans Act delivery
    systems); Retirement Housing; Retirement Planning; Guardianships,
    Conservatorships and other Surrogate Decision Making processes; Social
    Security; Supplemental Security Income; Tax Planning; and Trusts and
    Wills.

        Mr. Deal. Thank you. Dr. Stucki.

                     STATEMENT OF BARBARA R. STUCKI

        Ms. Stucki. Good afternoon. My name is Barbara Stucki. Over
    the past 12 years, I have been conducting research on private
    sector financing for long-term care. I currently manage the Use
    Your Home to Stay at Home Initiative for the National Council
    on the Aging. Thank you for the opportunity to testify about
    the potential of using home equity to help balance public and
    private funding for long-term care, and to respond to seniors'
    preference to age in place in their own homes.
        NCOA recently completed a study, funded by CMS and the
    Robert Wood Johnson Foundation, which provides compelling
    evidence that reverse mortgages could significantly increase
    the funds available to pay for home and community-based long-
    term care. We found that 82 percent of current seniors own
    their own homes and have more than $2 trillion in untapped
    housing wealth.
        Policy discussions on long-term care financing have largely
    ignored home equity as a source of private financing for in-
    home services and supports. This, in part, is because many
    retirees cannot get a conventional mortgage or home equity
    loan, because they lack sufficient income to make monthly loan
    payments. The recent development of reverse mortgages offers a
    new way for them to use their home to stay at home.
        Reverse mortgages are a special type of loan that allows
    people aged 62 and older to convert home equity into cash while
    they continue to live at home. The money borrowers receive is
    tax-free. Unlike conventional mortgages, there are no income
    requirements. Reverse mortgages, I should say borrowers, do not
    need to make any loan payments for as long as they live in
    their home. An important protection is that borrowers or their
    heirs will never owe more than the value of the home at the
    time they sell it or repay the loan.
        NCOA estimates that almost half of households aged 62 and
    older, that is 13.2 million households, are candidates for
    using a reverse mortgage to pay for long-term care at home. Our
    analysis shows that these loans could increase private sector
    funding for in-home services and supports by $953 billion.
    Reverse mortgages can also reduce dependence on Medicaid by
    lowering the risk of spend-down, saving Medicaid $3.3 to $5
    billion annually in 2010, depending on market penetration
    rates. These savings are based on our estimates that about 5
    million older households are at financial risk for needing
    Medicaid, and could obtain up to $308 billion from reverse
    mortgages. The funds available from these loans could be a
    powerful mechanism for allowing seniors to maintain their
    dignity and independence. Tapping home equity can also give
    seniors who have not been able to plan ahead through
    conventional means new options to pay for help at home.
        Greater awareness of the potential of reverse mortgages
    will help make this product a mainstream option for long-term
    care financing. Government, nonprofit organizations, and
    industry should work together to develop educational campaigns
    targeting consumers, service providers in the community, and
    senior advisors.
        There are a number of things Congress can do to promote the
    use of reverse mortgages. For example, a provision in the
    American Home Ownership and Economic Opportunity Act of 2000
    waives the upfront mortgage insurance premium for a reverse
    mortgage, but only when this loan is used entirely and
    exclusively to purchase private long-term care insurance. This
    limitation makes the provision unworkable. It should be changed
    to waive the premium for borrowers who use a reverse mortgage
    primarily to pay directly for long-term services and supports.
    Congress is also likely this year to consider making Medicaid
    long-term care public-private partnership programs more
    available in many States. A similar approach should be used to
    promote the use of reverse mortgages. States should also
    develop incentives to help frail seniors who cannot get help
    under Medicaid home and community-based waivers, because they
    have not yet met the nursing home level of care criteria.
    Reverse mortgages could pay for earlier interventions to reduce
    nursing home placement.
        Our written statement summarizes eight other policy
    proposals not related directly to reverse mortgages, for giving
    States more flexibility and improving access to Medicaid home
    and community services. I want to point out that NCOA opposes
    mandatory use of reverse mortgages. We believe that government
    incentives will increase demand for these types of loans while
    still preserving consumer choices and autonomy.
        In conclusion, policymakers should provide incentives for
    leveraging the literally hundreds of billions of dollars in
    untapped housing assets by promoting reverse mortgages as part
    of a public-private effort to help fund services for aging in
    place. With additional education, policy changes, and consumer
    protections, this strategy can open new possibilities for a
    more balanced approach to long-term care financing. This
    approach can reduce the risk of institutionalization, save
    Medicaid dollars, and enhance the quality of life for older
    Americans.
        Thank you.
        [The prepared statement of Barbara R. Stucki follows:]

    Prepared Statement of Barbara R. Stucki, Project Manager, Use Your Home
           to Stay at Home Initiative, National Council on the Aging

        Good morning, Mr. Chairman and Members of the Subcommittee. My name
    is Barbara Stucki. Over the past 12 years, I have been conducting
    research on private sector financing for long-term care. I currently
    manage the Use Your Home to Stay at Home Initiative for the National
    Council on the Aging (NCOA). I would like to thank you for providing
    the NCOA the opportunity to testify about the potential of using home
    equity to help better balance public and private funding for long-term
    care and to respond more rapidly to consumer preferences for ``aging in
    place.''
        As the population ages and the pressure on state Medicaid budgets
    rises, it becomes increasingly important to find effective ways to
    improve our long-term care financing system. Funding the growing demand
    for long-term care is a--major national challenge. The NCOA has
    recently completed a new study, funded by CMS and the Robert Wood
    Johnson Foundation, that provides compelling evidence that reverse
    mortgages could significantly increase the funds available to pay for
    home and community-based long-term care.
        With appropriate incentives, additional educational efforts and
    strong consumer protections, we believe that millions of older
    homeowners could benefit from using these loans to continue to live at
    home. Voluntary use of reverse mortgages could pay for many years of
    home and community services, and help postpone the need for assistance
    from Medicaid.

          REVERSE MORTGAGES--A NEW FINANCING OPTION FOR AGING IN PLACE

        Most older Americans would prefer to ``age in place'' in their own
    homes. The high proportion of long-term care paid by government,
    however, suggests that few seniors can afford to pay these costs for
    very long. One of the paradoxes of our current long-term care system is
    that impaired older Americans are struggling to live at home at a time
    when they own more than $2 trillion in untapped housing wealth. Home
    ownership is high among seniors (82%), even among the those at advanced
    ages (75 and older--78%). Many have accumulated substantial amounts of
    home equity, including families whose other retirement resources may be
    very modest. Over half the net worth of seniors is currently illiquid
    in their homes and other real estate.
        Policy discussions on long-term care financing have largely ignored
    home equity as a potential source of private financing for in-home
    services and supports. This situation arose, in part, because older
    homeowners have had few options to liquidate housing wealth. Many
    retirees cannot get a conventional mortgage or home equity loan because
    they do not have enough income to make monthly loan payments. The
    development of reverse mortgages in the last 15 years offers a new way
    for older Americans to ``use their home to stay at home'' by tapping a
    portion of their home equity.
        In the United States, reverse mortgages are the principal financial
    instruments available to seniors who want to convert some of their home
    equity into cash. Reverse mortgages can give older homeowners the funds
    they need to pay for long-term care and other expenses, while allowing
    them to continue living in their own homes. These types of loans are
    called ``reverse'' mortgages because the lender makes payments to the
    homeowner. Since the loan is based on the equity in the home, lenders
    do not consider the borrower's income, or credit and medical history in
    determining eligibility for a reverse mortgage. The Department of
    Housing and Urban Development (HUD) Home Equity Conversion Mortgage
    (HECM) program is the oldest and most popular reverse mortgage product.
    Currently, HECMs represent about 90 percent of all the reverse
    mortgages in the market.
        The amount that a homeowner can borrow is based primarily on the
    age of the youngest homeowner, the value of the home, and the current
    interest rate. Older owners (because of their limited life expectancy)
    and those with more expensive homes are able to get higher loan
    amounts. Borrowers can select to receive payments as a lump sum, line
    of credit, fixed monthly payment (for up to life), or a combination of
    payment options. Proceeds from a reverse mortgage are tax-free, and
    borrowers can use these funds for any purpose. Reverse mortgage
    borrowers do not need to make any payments for as long as they (or in
    the case of couples, the last living borrower) continue to live in the
    home as their primary residence. When the last borrower permanently
    moves or dies, the loan becomes due.
        There are several key protections in place for people who decide to
    take out a reverse mortgage. All reverse mortgages are non-recourse
    loans, which mean that the borrower or heirs never owe more that the
    value of the home at the time of sale or repayment of the loan. All
    borrowers who apply for any reverse mortgage must first receive
    independent counseling before they complete the loan application. In
    addition, Federal Truth-in-Lending law requires that reverse mortgage
    lenders disclose the projected average annual cost of the loan.
    Borrowers can cancel the loan for any reason within three business days
    after closing. To protect impaired older homeowners, additional
    standards may be required. Since these loans can be used for any
    purpose, there are currently no formal standards used by the mortgage
    industry when marketing this product.
        By using a reverse mortgage to liquidate a portion of their housing
    wealth, seniors do not have to move or relinquish control over their
    most important asset. Since reverse mortgages only allow borrowers to
    tap a portion of their home equity, there may be funds left over after
    paying off the loan to support the spouse or cover assisted living or
    other facility care. Borrowers or their heirs can also benefit from any
    appreciation in the value of the home over time. Spouses are protected
    since they will never owe more than the value of their home.

                     EXPANDING FINANCING FOR AGING IN PLACE

        Greater focus on home equity can add an important new element to
    the long-term care financing debate. Based on our analysis of the 2000
    Health and Retirement Study, NCOA estimates that almost half of
    households age 62 and older--13.2 million--are candidates for using a
    reverse mortgage to pay for long-term care at home (defined as being
    able to receive a minimum of $20,000 from this loan). The amount of
    funds that could become available if these older homeowners liquidated
    a portion of their home equity is substantial. By calculating the
    amount of funds that could be available from reverse mortgages for
    individual households, we estimate that these loans could increase
    private sector funding for in-home services and supports in total by
    $953 billion.
        Target populations--Reverse mortgages could play an important role
    in reducing the likelihood that older Americans will deplete their
    financial resources paying for long-term care. This could be especially
    important to older households with moderate incomes whose resources,
    while adequate for daily needs, are inadequate to handle more than a
    few years of home care payments (averaging about $27,000 per year in
    2000). This group is often referred to as ``tweeners.''
        The NCOA study estimates that among candidate households for a
    reverse mortgage, there are about 3.3 million households who are at
    financial risk for spending-down if they need home care (Table 1--
    Spend-down risk). These moderate-income elders could tap almost $63,000
    on average with a reverse mortgage. Most of these households (66
    percent) consist of unmarried homeowners.

                                Table 1. Distribution of home ownership by market segment
    ----------------------------------------------------------------------------------------------------------------
                                                                                  Candidate
                                             Total     Total owner    % total    households     % total     % owner
                                           households   households  households   for using a  households  households
                                            age 62+                              RM for LTC
    ----------------------------------------------------------------------------------------------------------------
    Medicaid beneficiary................    2,537,000    1,058,000      41.7%        437,000      17.2%       41.3%
    High risk Medicaid..................    4,444,000    2,927,000      65.9%      1,403,000      31.6%       47.9%
    Spend-down risk.....................    7,331,000    5,449,000      74.3%      3,321,000      45.3%       60.9%
    Low Medicaid risk...................   13,083,000   11,642,000      89.0%      8,034,000      61.4%       69.0%
      Total.............................   27,397,000   21,077,000                13,196,000
    ----------------------------------------------------------------------------------------------------------------
    Source: NCOA calculations based on data from the 2000 Health and Retirement Study.

        About 0.4 million candidate households are Medicaid beneficiaries.
    On average, these homeowners who live in the community could receive a
    HECM loan worth $51,229. At current interest rates, these funds would
    enable them to make monthly withdrawals of $1,465 from a HECM
    creditline for about three years, or monthly withdrawals of about $470
    for ten years (Table 2). Only about one in three of these candidate
    households are married. Though Medicaid beneficiaries may be receiving
    home and community services, additional cash from reverse mortgages can
    help cover unmet needs while providing greater choice and control over
    services.
        High Medicaid risk households have very limited income and assets.
    These financially vulnerable elders could access a lump sum or line of
    credit worth on average $55,085 from a HECM loan (Table 2). With
    limited financial resources, they would quickly qualify for public
    assistance if they needed long-term care. Since the home is a protected
    asset under Medicaid eligibility rules, the motivation to access home
    equity among this group is likely to be small. However, a reverse
    mortgage could be very important to support family caregiving, since
    most (69 percent) homeowners in this group are married. These loans
    could also help this group of elders avoid institutionalization. These
    older homeowners may not be able to afford an assisted living facility,
    and there are long waiting lists for HCBS waivers and subsidized
    housing.

                             Table 2. Amount of potential HECM funds, by Medicaid risk level
    ----------------------------------------------------------------------------------------------------------------
                                                               Average potential   Monthly withdrawals by estimated
                                                                    cash or                duration of funds
                                                               creditline from a -----------------------------------
                                                                   HECM loan        3 years     5 years    10 years
    ----------------------------------------------------------------------------------------------------------------
    Medicaid beneficiary.....................................            $51,229      $1,465        $895        $470
    High risk Medicaid.......................................            $55,085      $1,575        $964        $506
    Spend-down risk..........................................            $62,800      $1,798      $1,100        $577
    Low Medicaid risk........................................            $80,130      $2,290      $1,403        $737
      Total..................................................            $72,128
    ----------------------------------------------------------------------------------------------------------------
    NCOA calculation using the AARP reverse mortgage calculator and a creditline interest rate of 4.35%.

        Low Medicaid risk households include homeowners who can afford to
    pay for daily home care for at least two years (single households) or
    four years (married households). The average reverse mortgage loan
    value among this group is $80,130. With greater access to liquid
    assets, more affluent elders might be reluctant to tap home equity to
    pay directly for in-home services and supports. Demand for reverse
    mortgages among this group may instead emerge from a desire to protect
    their wealth and leverage their resources through private long-term
    insurance. About half (53 percent) of Low Medicaid risk households
    consist of couples.
        Potential savings to Medicaid--For many middle-income seniors on
    fixed incomes, a reverse mortgage can be a critical resource to help
    avoid a financial crisis. This loan could pay for over three years of
    daily home care visits or eight years of adult day care for a homeowner
    age 85 with a median priced home (Figure 1).
    [GRAPHIC] [TIFF OMITTED] T0749.010

        Payments from a reverse mortgage can help reduce dependence on
    Medicaid and reduce the risk of institutionalization. Increased use of
    this financial option for long-term care could result in savings to
    Medicaid ranging from about $3.3 to almost $5 billion annually in 2010,
    depending on market penetration rates increasing from 4 percent to 25
    percent of older homeowners. This represents 6 to 9 percent of the
    total projected annual Medicaid expenditures, including nursing home
    care. These reductions result from the additional income available to
    borrowers that would delay eligibility for Medicaid. When contrasted
    with the amount Medicaid is expected to spend on seniors for long-term
    care services at home in 2010 ($14.9 billion, based on estimates by the
    Congressional Budget Office), $3.3 to $5 billion in reverse mortgage
    funds could be a substantial additional resource for people who need
    assistance to age in place.

    Rebalancing the System
        Many states and communities are developing creative ways to support
    older people who want to age in place. The impetus for these efforts
    reflects the convergence of two important goals: meeting consumers'
    desire to stay at home while controlling the rising cost of long-term
    care. Despite local and national efforts to promote aging in place,
    however, the pace of change has been slow. Reverse mortgages could
    provide an immediate source of funds to stimulate and enhance
    government efforts to rebalance our country's long-term care system
    toward increased access to home and community services.
        For many older Americans, the home is their most valuable asset.
    Many are reluctant to touch this resource until their other financial
    resources and family caregivers are exhausted. This strategy can
    increase the risk that seniors will not have enough money to maintain
    their independence or the home they cherish. When they reach a crisis
    point, older homeowners often tap home equity by selling the home.
    Housing wealth, however, can be more than just a last resort. Reverse
    mortgages can pay for preventive measures such as home modifications,
    expenses of family caregivers, as well as day-to-day support that can
    reduce the risk of institutionalization.
        Reverse mortgages can also strengthen existing financial plans by
    filling in gaps (such as the cost of replacing a furnace) and help
    impaired elders manage cash flow to cope with the uncertainties that
    often come with a chronic health condition. Tapping home equity can
    give seniors who have not been able to plan ahead through conventional
    means (such as long-term care insurance) new options for maintaining
    independence and choice if they need help at home. These loans give
    seniors more flexibility in managing their financial assets over time.
        Reverse mortgages hold considerable promise to help impaired, older
    homeowners pay for the services they need to continue to live at home.
    Using home equity to pay for long-term care insurance is more
    problematic. Based on our analysis, this approach will likely be an
    option for only a very small number of older homeowners. It can be very
    costly for borrowers since they would be paying both insurance premiums
    and interest on the loan for many years. In addition, borrowers who use
    the proceeds of their loan to pay their premiums face the risk of their
    coverage lapsing if they run out of loan funds before they need care.
    An alternate approach would be to use the loan proceeds to increase the
    amount of home and community care that homeowners fund out-of-pocket.
    This could make private insurance more affordable because elders could
    buy more limited long-term care insurance coverage. Current
    policyholders could also use a reverse mortgage for additional funds to
    avoid lapsing their existing coverage.

    Need for Government Action
        Additional cash from reverse mortgages offer impaired elders the
    flexibility and choice that can enhance aging with independence and
    dignity. This financing option should appeal to a greater number of
    older Americans and can encourage increased personal responsibility.
    But the strong feelings that today's seniors have about their homes
    suggest that this approach will not be a quick or easy solution to our
    nation's long-term care financing problem. Few older homeowners are
    currently interested in using a reverse mortgage due to a reluctance to
    use home equity and a lack of understanding about how these loans work.
    Without additional education and strong incentives to support family
    decisions regarding the use of home equity, the actual number of older
    homeowners who take out a loan to pay for help at home is likely to be
    small.
        Impaired, older homeowners need additional information to evaluate
    the appropriateness of taking out a reverse mortgage. Consumer outreach
    can help older homeowners and their families understand the benefits
    and limitations of using a reverse mortgage to ``age in place.''
    Greater awareness of the potential of reverse mortgages will help
    seniors and the people who advise them consider this product as a
    mainstream option for long-term care financing.
        Government, non-profit organizations, and industry could work
    together to develop educational campaigns targeting consumers, service
    providers in the community, and senior advisors. The state and federal
    governments should also include the use of reverse mortgages in their
    educational efforts on long-term care. The NCOA study found that adult
    children are far more comfortable with the idea of using home equity
    than their parents. Conversations about reverse mortgages could serve
    as an important catalyst to help families plan for their long-term care
    needs. A broad public education campaign would be of enormous value.
        There are a number of other things Congress and CMS can do to
    address several consumer concerns that currently limit the use of home
    equity.
        1. Remove government barriers that hinder access to reverse
    mortgages. Since reverse mortgages must be in first lien position,
    state use of Medicaid liens can be a deterrent to promoting home equity
    to pay for long-term care. Fannie Mae requires that any outstanding
    liens against the property must be paid in full at the loan closing. If
    a state places a lien on a home when one spouse goes on Medicaid, the
    community spouse will not be eligible to apply for a reverse mortgage.
    CMS should clarify Medicaid rules to ensure that Medicaid liens will be
    released if the surviving spouse wants to sell or refinance the
    property, or obtain a reverse mortgage.
        2. Increase the funds available from home equity by reducing
    reverse mortgage loan costs. In 2000, Rep. LaFalce included a provision
    in the American Homeownership and Economic Opportunity Act to amend
    Section 255 of the National Housing Act to waive the up front mortgage
    insurance premium (usually 2 percent) for a reverse mortgage used to
    purchase private long-term care insurance. While we support the intent
    of the law, which was to make reverse mortgages more available for
    long-term care needs, it unduly limits consumers' options by requiring
    participants to use the entire payment exclusively for insurance. A far
    more desirable and appropriate use would be for long-term services
    themselves. Congress should amend or repeal the provision and instead
    waive the premium for borrowers who use a reverse mortgage primarily to
    pay for such services and supports. The law could also be expanded to
    waive the premium for borrowers independently assessed to need long-
    term care.
        3. Stretch loan funds to promote aging in place for as long as
    possible. The Center for Medicare and Medicaid Services (CMS) could
    enable Medicaid beneficiaries to use funds from a reverse mortgage to
    purchase non-covered home- and community-based services. Other
    alternatives include developing Medicaid buy-in programs with home
    equity or enabling states to target older homeowners at risk for
    Medicaid.
        CMS could allow states to experiment with programs that target
    seniors who are ineligible to qualify for home and community services
    under a Medicaid waiver program because they have not yet met the
    nursing home level of care criteria. Incentives could be developed to
    use home equity to pay for earlier interventions that support aging in
    place and reduce the risk of institutionalization.
        4. Reduce the risk of impoverishment and protect the spouse.
    Congress is likely this year to consider making long-term care
    ``public-private partnership'' programs more available to consumers in
    many states. Four states--California, Connecticut, Indiana and New
    York--now use this approach to promote the purchase of long-term care
    insurance by protecting purchasers' resources from the Medicaid
    eligibility asset test. A similar approach should be used to promote
    the use of reverse mortgages. Borrowers who use a certain portion of
    the equity in their homes to pay for long-term care could receive more
    favorable treatment under Medicaid's resource rules.
        Government incentives for reverse mortgages may encourage impaired
    seniors to access home equity sooner and reduce the need to recoup
    public long-term care expenses through estate recovery. Many of the
    consumer concerns that motivate the use of Medicaid estate planning,
    such as loss of control of assets and a desire to leave a bequest, can
    be addressed through reverse mortgages. By providing cash, these loans
    enable impaired seniors to control the type and amount of services they
    receive. Since a reverse mortgage only taps a portion of home equity,
    it is possible that there will be funds left for heirs after the loan
    is paid.

    Use of Reverse Mortgages Must be Voluntary
        In developing a roadmap for the future, it will be important to
    ensure that the desire for government savings is balanced with the need
    to expand the ability of seniors to continue to live at home. As we
    look to the future, it will be important to find ways to improve the
    functioning of the reverse mortgage market in such a way that both
    consumers and government benefit.
        NCOA opposes mandatory use of reverse mortgages. We believe that
    government incentives will increase demand for these types of loans
    while still preserving consumer choice and autonomy. Incentivizing the
    use of reverse mortgages also offers a better way to respond to rising
    demand and fiscal constraints. Offering incentives to increase the use
    of home equity could open new avenues for public and private resources
    to complement one another in meeting the changing needs of impaired
    seniors who live at home.

    Other Medicaid Reforms
        There are a wide variety of other Medicaid long-term care reforms
    that would promote greater independence, dignity and choice, while
    reducing per capita costs. For example, NCOA supports:

     The President's ``Money Follows the Person'' rebalancing proposal.
            Under the proposal, for persons transitioning out of
            institutions, the federal government would cover the entire
            first year of costs for Medicaid home and community-based
            waiver services in select states;
     Permitting states to provide Medicaid home and community-based
            services (HCBS) under a state plan amendment, rather than
            having to go through an often burdensome waiver process;
     Giving states more flexibility by eliminating the current requirement
            that Medicaid HCBS coverage be linked with a need for nursing
            home level of care;
     Recognizing under the Medicaid eligibility asset test that persons in
            need of HCBS must pay for housing, food, clothing, utilities,
            and transportation, while nursing home residents do not incur
            these costs;
     Leveling the playing field on protections for spouses since, under
            current law, spousal impoverishment protections are mandatory
            for nursing facility services, optional for HCBS waiver
            programs, and prohibited under the Medicaid personal care
            program;
     Permitting states to include Medicare savings in their Medicaid HCBS
            waiver budget neutrality calculations;
     Reducing barriers for states to provide consumers with greater
            opportunities to choose consumer directed models of Medicaid
            home and community services, such as cash and counseling; and
     Permitting Medicaid recipients in need of long-term care to receive
            community attendant services as an alternative to institutional
            care.
        In summary, funding the growing demand for long-term care is a--
    major national challenge. Policymakers should leverage limited housing
    assets by promoting reverse mortgages as part of a public-private
    effort to help fund services for aging in place. With additional
    education and strong consumer protections, this strategy can open new
    possibilities for a more coordinated financial approach that can reduce
    the risk of institutionalization and enhance quality of life for older
    Americans.

        Mr. Deal. Thank you. Ms. Hansen.

                     STATEMENT OF JENNIE CHIN HANSEN

        Ms. Hansen. Thank you, Mr. Chairman and Mr. Brown. Can you
    hear me now? Yes, I hear myself. All right. Thank you, Mr.
    Chairman and members of the subcommittee who are here. My name
    is Jennie Chin Hansen. I am a member of the Board of Directors
    of AARP, and I appreciate the opportunity to testify.
        I will be testifying primarily on the area of reverse
    mortgages, as well as long-term care insurance, and also, the
    partnership program, but as an aside comment, part of my past
    25 years actually has been involved with a program that
    integrated acute and long-term care. I was the direct--the
    organization of On Lok Senior Health Services just a few months
    ago, and certainly, many of the comments of looking at the
    issues of community-based care is really fundamental to really
    the founding of our organization. So we really do, as AARP, and
    certainly, in my previous role as head of the prototype for the
    National Pace Program, really support this whole effort right
    now on moving toward community-based care.
        But the issue at stake today is really about Medicaid, and
    I think so much has already been said, to acknowledge that with
    Medicaid and long-term care, there really isn't an effective
    system that has been designed, and especially since it was
    designed as a program close to 40 years ago, that was
    institutionally based. Ironically, the fact that nursing homes
    were actually considered the alternative at that time to help
    families, and so here we have a pendulum swing at this time to
    make sure that we do have services moving in the other
    direction.
        But right now, with the fundamental issue that we have is
    oftentimes the need for both discussion and debate on how to
    provide Americans with further alternative options for
    financing long-term care, just so that they don't have to rely
    on Medicare, excuse me, Medicaid alone, and then how to make
    sure that we will preserve and strengthen the program of
    Medicaid as a health insurance safety net.
        We well understand and appreciate the immediate concerns of
    the Governors and Congress, as we have been hearing today,
    about the challenges of financing Medicaid, both now and in the
    future. There are policy changes that can make Medicaid more
    effective, but these changes should be driven by sound policy,
    and not just the arbitrary budget target.
        However, we do recognize the need for some immediate
    changes in the Medicaid program, but we don't think that that
    should overshadow the longer range debate about transforming
    our system of long-term care, of which many speakers have
    spoken in a similar manner. Today, I have been asked to speak
    about three options for financing long-term care, reverse
    mortgages, long-term care insurance, and the long-term care
    partnership program.
        You have heard a great deal earlier from the expertise of
    Dr. Stucki about the interest on reverse mortgages, but we
    wanted to address this as AARP, that this could play an
    important role as one answer to helping in the financing of
    long-term care. The chief advantages that we see of reverse
    mortgages are that there are no income limits or requirements,
    as Dr. Stucki has said, and then, especially, that there are no
    required monthly payments. But a huge downside is the
    considerable high cost associated with instituting a reverse
    mortgage. The total upfront cost of this could affect a typical
    borrower at the rate of $16,500 per transaction.
        So there have been changes, some that have been enacted,
    and some proposed, that would make reverse mortgages less
    attractive to consumers. In the year 2000, Congress waived the
    upfront mortgage premium for individuals who get a reverse
    mortgage through HECM, but only if the available equity is used
    to buy long-term care insurance, as was stated.
        Tying the purchase of long-term care insurance to a reverse
    mortgage is expensive for the consumer, and not necessarily the
    best way to finance needed services. The homeowner pays all the
    costs associated with the reverse mortgage, and plus the long-
    term care policy itself. The equity, needless to say, is tied
    up in insurance and not available to directly purchase
    preferred home and community-based services, or to actually do
    some work on their home to make it safer for them to be able to
    stay at home.
        Some suggested really using the reverse mortgage in order
    to qualify for Medicaid. Unfortunately, this approach would
    expose a community spouse to a much greater risk of
    impoverishment, and in some cases, Medicaid could actually end
    up paying more to care for somebody who has had a reverse
    mortgage. Given the limited experiences most consumers have had
    with reverse mortgages, a logical way would be to test the use
    of these loans as a long-term financing option, is a
    possibility through a limited demonstration program. These
    demos could be designed to reduce borrower cost, and I think
    Dr. Stucki offered that as an option, and this is what we
    realize is a key reason why people don't want to take out
    reverse mortgages. In fact, the current HECM program began
    initially as a research and development study that became a
    demonstration program, and eventually became, now, a permanent
    program.
        So let me turn briefly to long-term care insurance, which
    has had a limited role in financing long-term care.
    Unfortunately, as you have heard, people don't buy long-term
    care policies for a wide variety of reasons, including costs,
    the market instability, denial that they need it, and other
    pressing financial issues that they may be facing.
        We wanted to emphasize that consumer protections, as has
    been cited, is an important part of long-term care policies.
    The National Association of Insurance Commissioners has
    developed a long-term care insurance model act and regulations
    that States can adopt to provide standards for long-term care
    policies. Legislation introduced in previous Congresses include
    consumer protections for long-term care insurance, and this,
    AARP supports.
        Finally, I have been asked to comment on the long-term care
    partnership program that allows individuals who buy long-term
    care insurance policies to protect a certain amount of their
    assets to become eligible for Medicaid. The program, as you
    have heard from both Dr. McClellan and many other speakers, is
    limited to four States, and only a small number of partnership
    programs right now have actually accessed Medicaid. It is not
    clear whether these persons using Medicaid would have likely
    spent down to Medicaid if they did not have a partnership
    program, and that was what Dr. Holtz-Eakin had said also.
        Partnership programs may offer another option for financing
    long-term care, but several improvements really need to be
    made, as outlined in my written testimony. So, we know that
    Congress must begin to look for options that will allow for
    Americans to pay for the care that they need in the setting of
    their choice. Choice has been an operative word here.
        AARP stands ready to work with members on both sides of the
    aisle, the administration, and all stakeholders, to really
    address this emerging and very important issue of long-term
    care facing our country.
        Thank you very much.
        [The prepared statement of Jennie Chin Hansen follows:]

          Prepared Statement of Jennie Chin Hansen, AARP Board Member

        Mr. Chairman and members of the Subcommittee, I am Jennie Chin
    Hansen, a member of AARP's Board of Directors. Thank you for the
    opportunity to testify today.
        Affordable long-term care is a critical issue for AARP members and
    their families. I learned this firsthand as the Executive Director of
    On Lok, Inc., a non-profit family of organizations that provide
    comprehensive primary, acute, and long-term care services to nearly 950
    frail older persons and 5,000 other older adults in San Francisco.
        AARP believes the time has come to reinvigorate a national debate
    over how to help Americans plan for and obtain the long-term care
    services they need in the most appropriate setting. To that end we
    commend the Subcommittee for holding this hearing. We hope that this is
    the first in a series of ongoing discussions.

              THE NEED FOR AN AFFORDABLE SYSTEM OF LONG-TERM CARE

        Americans are living longer than ever thanks to tremendous advances
    in medicine and public health, and this longevity brings the need for
    appropriate long-term care. The segment of our population age 85 and
    older--those most likely to need long-term care--is estimated to
    increase by over 2.6 million people (about 60 percent) between 2002 and
    2020. Baby boomers are now nearing retirement, taking care of aging
    parents, and facing their own future long-term care needs. In the near
    future, more Americans in their 60s will be caring for people in their
    80s and 90s. We hear from our members every day who are trying to do
    the right thing--balancing the demands of work and family and balancing
    their personal finances, while worrying about their future retirement
    income and how to pay for long-term care.
        Unfortunately, aside from a handful of programs like On Lok, there
    is no comprehensive public system of long-term care available to most
    Americans and very few other long-term care financing options exist.
    Long-term care insurance is limited and generally expensive. According
    to America's Health Insurance Plans, in 2002, the average cost of a
    long-term care insurance policy with automatic inflation protection was
    $1,134 per year when purchased at age 50 and $2,346 per year if
    purchased at age 65.
        Public programs are also limited. Medicare provides some home
    health and skilled care, but does not cover nursing home stays.
    Medicaid's income and asset limits require impoverishment. For those
    people who pay out-of-pocket for their care, the expense associated
    with years of care often outstrips personal savings. According to a
    recent MetLife Marketing Institute report in 2004, the average annual
    nursing home costs were over $61,000 for a semi-private room and over
    $70,000 for a private room. The average hourly rate for a home health
    aide in 2004 was $18, so as little as 10 hours a week of home health
    care would average over $9,000 per year.
        Many Americans currently rely on informal caregivers for the bulk
    of long-term care services. According to a forthcoming analysis of data
    from the National Long-Term Care Survey for AARP, over 90 percent of
    persons age 65 and older with disabilities who receive help with daily
    activities are helped by unpaid informal caregivers. Two-thirds of
    those 65 years of age and older with disabilities who receive help with
    daily activities only receive informal unpaid help. But caregivers face
    many physical, emotional, and financial demands that often take a
    serious toll.
        One of the fundamental issues at the heart of the current Medicaid
    debate is how to provide Americans and their families with alternative
    options for financing long-term care services while maintaining
    Medicaid as a critical safety net program for the millions of lower
    income Americans who rely on it for health care. The notion that middle
    and upper income Americans are clamoring to qualify for long-term care
    coverage through a poverty program is far from accurate. The problem is
    that there are few other options available.
        We believe one way to change the paradigm is to create new choices
    that give consumers more control and allow older Americans and people
    with disabilities to age with dignity and independence in the setting
    of their choice. We also believe it is important that consideration of
    specific long-term care financing options be made in the context of
    this broader discussion, and not be driven by the current budget debate
    and a specific budget target.
        As Congress begins to explore new financing options, we should look
    to the growing role that private financing is already playing to
    support people with disabilities and their families with the home-and
    community-based services that they prefer. Our members want greater
    control over the services they receive and the providers of those
    services. Policymakers, providers, and consumers should work together
    to bring about comprehensive changes in the way we finance and deliver
    care. At the same time, we must work to strengthen Medicaid to ensure
    that it provides choices and quality care to the persons who rely on
    the program.
        Our testimony today focuses on three specific financing options for
    long-term care and the pros and cons of each: reverse mortgages, long-
    term care insurance, and the Long-Term Care Partnership Program.

                               REVERSE MORTGAGES

        Because of the large and growing amount of home equity held by some
    older Americans, increased attention is being paid to the role this
    resource could play in financing long term care. Over the past decade,
    more homeowners have begun using their home equity as a means of paying
    for long-term care services. In some cases, they have done so by
    selling their homes and reassigning the proceeds to assisted living and
    continuing care retirement communities (CCRCs). Others have used home
    equity to retrofit their houses or to pay directly for home and
    community-based services. Still others have chosen reverse mortgages
    for purposes other than long-term care.
        There are two basic types of reverse mortgages: public sector
    reverse mortgages that must be used for a single purpose and private
    sector reverse mortgages that can be used for any purpose. Public
    programs are offered by some state and local governments, generally at
    a low cost, and with income requirements. Most of these programs are
    limited to paying for home repairs or property taxes, although
    Connecticut developed a program specifically for long-term care
    financing.
        Private sector reverse mortgages include the Home Equity Conversion
    Mortgage Program (HECM) that is insured by the Department of Housing
    and Urban Development (HUD), as well as two smaller private programs.
    HECMs make up more than 90 percent of the private sector reverse
    mortgage market.
        To qualify for a reverse mortgage, an individual must: be age 62 or
    over; occupy the home as a primary residence; have paid off the
    mortgage or have a mortgage balance that could be paid off with
    proceeds from the reverse mortgage at closing; undergo required
    counseling in the HECM program; and live in a home that meets minimum
    HUD property standards. According to a recent study, HECM borrowers
    tend to be older, female, racially and ethnically mixed, live alone,
    and have lower incomes.
        The chief advantages of these loans are that there are no income
    limits or requirements, and there are no required monthly repayments.
    The amount of money available depends upon the: age of the youngest
    borrower; the value of the home; the median home value in the county;
    current interest rates and other loan costs; and the type of private
    sector loan. Money from the reverse mortgage can be paid to the
    borrower as a lump sum payment at closing, monthly payments, a line of
    credit, or a combination of these methods. Borrowers make no loan
    payments as long as they live in the house. The loans are paid back
    when the last living borrower dies, sells the house, or permanently
    moves away.
        A considerable downside to reverse mortgages is the high costs
    associated with the loans. For example, the total upfront costs and
    deductions on a HECM loan for a typical borrower (75 years old and
    living in a home valued at $230,000) is about $16,500. This amount is
    nearly equal to the $17,000 median income of HECM borrowers.
        Another disadvantage is the small size of the private reverse
    mortgage market. Even though HUD indicates the market is growing, only
    about 139,000 HECM loans have been taken out since the program's
    inception in 1989. High costs are a key reason cited by prospective
    borrowers for deciding against a HECM.

                  REVERSE MORTGAGES ARE NOT ALWAYS THE ANSWER

        In 2000, Congress included a provision in the American
    Homeownership and Economic Opportunity Act that waives the upfront
    mortgage insurance premium for individuals who get a reverse mortgage
    through HECM if all the available equity is used to buy long-term care
    insurance. Consumer organizations--including AARP--have objected to the
    required tie to an insurance purchase and, to date, HUD has not
    implemented the program.
        Tying the purchase of long-term care insurance to a reverse
    mortgage is expensive for the consumer and not necessarily the best way
    to finance needed services. The homeowner pays all the costs associated
    with the reverse mortgage plus the premiums and cost-sharing for the
    long-term care insurance policy, and it is not required that consumers
    be informed of the total, combined cost. Over time, reverse mortgage
    costs can double or triple the total cost of purchasing long-term care
    insurance due to high upfront loan costs and the growing amount of
    interest charged on the loan. Homeowners who can afford long-term care
    insurance without borrowing would be unlikely to need to use a reverse
    mortgage for this purpose particularly if they know how much the loan
    would add to the total cost. If homeowners cannot afford to buy long-
    term care insurance, it would not be wise to use a reverse mortgage to
    purchase the insurance since the reverse mortgage only adds to the cost
    of the insurance.
        Another issue is the lack of a requirement to disclose the risks
    related to long-term care insurance policy cancellation or lapses, HECM
    loan default, or Medicaid eligibility. For example, if an individual
    exhausts all available reverse mortgage funds for the long-term care
    insurance premiums and is no longer able to pay the premiums, the
    policy could be cancelled or lapse due to nonpayment. The insurance
    coverage would be lost; the borrower would owe substantial and growing
    debt on the home, and would no longer be able to pay for the cost of
    long-term care.
        Finally, borrowers could only use the loan money for insurance
    policies and not to directly purchase home-and community-based services
    or for home modification that may better meet their needs. Most older
    Americans want to remain in their homes and are looking for ways to get
    needed services there rather than be institutionalized. Use of reverse
    mortgages may be one means of financing long-term care, but consumers
    should not be required to use their equity to purchase an insurance
    policy. Rather, they should have the choice to use the equity for the
    appropriate services in the setting of their choice.
        In addition, some are considering requiring the use of a reverse
    mortgage in order to qualify for Medicaid. AARP does not support such a
    proposal. A reverse mortgage requires that a significant portion of
    home equity is used to pay for the costs of the reverse mortgage,
    rather than paying directly for long-term care needs. In fact,
    according to a recent study by Mark Merlis, there could be cases under
    such a proposal in which Medicaid actually ends up spending more to
    care for someone with a reverse mortgage. This is because Medicaid can
    recoup more of the money it spends through estate recovery if none of
    the home's equity has already been consumed by the high upfront costs
    and growing interest charges on a reverse mortgage. With a prior
    reverse mortgage, Medicaid cannot recover home equity that has already
    been used to pay the high costs of the loan.
        Requiring a reverse mortgage before Medicaid eligibility would be
    particularly burdensome for persons owning lower-valued homes. For
    example, a 62-year-old living in a $50,000 home could qualify for a
    HECM reverse mortgage of just under $29,000--but over $10,000 of that
    amount would be needed for upfront loan costs and deductions, leaving
    the borrower with less that $19,000 in available loan funds. Medicaid
    would be requiring this homeowner to obligate over $10,000 of home
    equity in order to borrow less than $19,000.
        This proposal raises many other concerns including the fact that
    taking out a reverse mortgage to cover the nursing home costs of a
    spouse would expose a surviving community spouse to much greater risk
    of impoverishment.

               OPPORTUNITIES TO TEST THE USE OF REVERSE MORTGAGES

        Given the limited experience most consumers have with reverse
    mortgages, a logical way to test this approach is through a limited
    demonstration program. One approach is to look at two ways to reduce
    borrower costs: 1) with modest, one-time public subsidies and
    competition among private providers in the HECM program, or 2) by
    building on the experience of low-cost public sector reverse mortgage
    programs to develop public loans for long-term care. Either way,
    borrowers would be able to access their own home equity to pay for the
    lower-cost services they want instead of waiting for estate recovery
    and liens to reimburse Medicaid for the institutional care they want to
    avoid.
        Demonstration programs would allow for the examination of how
    people could use reverse mortgages to pay for their long-term care
    needs, which segments of the population might best be served by using
    reverse mortgages, how reverse mortgages could help expand access to
    home-and community-based services, and how to give people more choice
    and control in how they receive long-term care services.
        The public sector has experimented with reverse mortgages relating
    to long-term care. The HECM program also provides valuable experience
    that could be drawn on to establish a demonstration program to allow
    older homeowners with disabilities to remain in their homes longer by
    using reverse mortgages to pay for services that they need to remain
    independent. Reverse mortgages could pay for things like home health
    care, chore services, and home modification.
        Demonstrations would create opportunities for the federal and state
    governments, the private sector, and consumer groups to work together
    to explore the potential of reverse mortgages to pay for long-term
    care. There is time to carry out demonstration programs to test new
    approaches, to bring down the cost of reverse mortgages, and to make
    sure we get the policy right.

                            LONG-TERM CARE INSURANCE

        Relatively few older persons have private insurance that covers the
    cost of long-term care. Many common long-term care needs (e.g. bathing,
    dressing, and household chores) are not medical in nature, do not
    require highly skilled help and, therefore, are not generally covered
    by private health insurance policies or Medicare. Long-term care costs
    are significant. The average hourly rate for a home health aide in 2004
    was $18, so even just ten hours of home health care per week would cost
    over $9,000 per year. Average annual nursing home costs were over
    $61,000 for a semi-private room and over $70,000 for a private room in
    2004, according to a recent MetLife Mature Marketing Institute report.
        The market for private long-term care insurance has grown in recent
    years, but its overall role is still limited. Currently long-term care
    insurance pays for only about 11 percent of all long-term care costs.
    By the end of 2002, over 9.1 million long-term care insurance policies
    had been sold in the United States with about 6.4 million of these
    policies still remaining in force. Most policies sold today cover
    services in nursing homes, assisted living facilities, and in the home.
    Typically, policies reimburse the insured for long-term care expenses
    up to a fixed amount, such as $100 or $150 per day. To receive
    benefits, the insured must meet the policy's disability criteria.
    Nearly all policies define disability as either severe cognitive
    impairment or the need for help in performing at least two activities
    of daily living (such as bathing and dressing). Most policies sold are
    in the individual market.
        The cost of long-term care policies varies dramatically depending
    on a number of factors. The consumer's age at the time of purchase, the
    amount of coverage, and other policy features affect the policy's cost.
    Insurance companies can increase premiums for entire classes of
    individuals, such as all policyholders age 75 and older, based on their
    experience in paying benefits. Older adults are more likely to have
    more long-term care needs and higher costs, thus higher premiums. Other
    factors that affect the policy's premium include the duration of
    benefits, the length of any waiting period before benefits are paid,
    the stringency of benefit triggers, whether policyholders can retain a
    partial benefit if they let their policy lapse for any reason,
    including inability to pay (nonforfeiture benefit), and whether the
    policy's benefits are adjusted for inflation. Individuals with
    federally qualified long-term care insurance policies can deduct their
    premiums from their taxes, up to a maximum limit, provided that the
    taxpayer itemizes deductions and has medical costs in excess of 7.5
    percent of adjusted gross income.
        There are several reasons why Americans have not purchased long-
    term care policies. Denial is an important factor--most of us do not
    want to think about needing long-term care assistance. About one-third
    of Medicare beneficiaries still believe that they can rely on Medicare
    for their long-term care. Cost is another critical factor. Younger
    individuals are often concerned with the immediate costs of monthly
    bills, as well as major items such as buying a home, putting children
    through college, and saving for retirement. People don't plan for long-
    term care needs that they don't know much about or think they will not
    have. People may also associate a long-term care insurance policy with
    institutionalization. Others may be leery of long-term care insurance
    due to large premium increases and market instability. In addition,
    some individuals are not able to qualify for long-term care insurance
    due to underwriting.
        Consumer protections are an important part of long-term care
    insurance policies. Standards and protections for long-term care
    insurance policies could make them better products that consumers are
    more likely to buy. For example, an individual who buys a policy in his
    or her 60s may not need long-term care for over 20 years. Without
    inflation protection, the value of the insurance benefits can erode
    over time. A daily benefit of $100 in coverage will not buy as much
    care in 2025 as it does today. Nonforfeiture protection allows a
    consumer who has paid premiums for a policy, but can no longer afford
    to pay premiums to still receive some benefits from the policy.
        The National Association of Insurance Commissioners (NAIC) has
    developed a Long-Term Care Insurance Model Act and Regulations that
    states can adopt to provide standards for long-term care insurance
    policies sold in a state. NAIC standards include: inflation protection,
    nonforfeiture, required disclosures to consumers, minimum standards for
    home health and community care benefits, premium rate stabilization,
    and standards for what triggers benefits. While all states have adopted
    some of the NAIC provisions, only 21 states have adopted a critical
    provision on premium stability that protects consumers from
    unreasonable rate increases that could make their policies
    unaffordable.
        Legislation introduced in previous Congresses by Representatives
    Nancy Johnson (R-CT) and Earl Pomeroy (D-ND) includes consumer
    protections mandated by the Health Insurance Portability and
    Accountability Act of 1996 and incorporates some of the consumer
    protections in the NAIC Model Act and Regulations. AARP supports the
    standards for long-term care insurance included in this legislation.

                          LONG-TERM CARE PARTNERSHIPS

        A hybrid of the public/private approach to financing long-term care
    services is the Long-Term Care Partnership Program. Currently operating
    in four states (California, Connecticut, Indiana, and New York), the
    program allows individuals who buy long-term care insurance policies
    under the program to protect a certain amount of their assets and
    become eligible for Medicaid. People who purchase long-term care
    insurance policies under the Partnership are partially exempt from
    estate recovery under Medicaid, except for New York and Indiana which
    offer total asset protection. A provision in the Omnibus Budget
    Reconciliation Act of 1993 limited this estate recovery exemption to
    these four states who had state plan amendments approved by May 14,
    1993 (plus Iowa which has not implemented a Partnership program).
        The goals of the Partnership include encouraging people to buy
    private long-term care insurance when they might not otherwise do so;
    saving money for Medicaid by delaying or preventing spend-down to
    Medicaid eligibility; reducing the incentive for individuals to
    transfer assets; and saving money for individuals by having them rely
    on insurance policies to cover long-term care costs that they would
    have paid otherwise.
        According to recent evaluations of the program, about 181,600
    insurance policies have been sold under the Partnership. About 149,300
    are currently in force. Of the individuals who purchased policies, only
    about 2,200 persons (1.2 percent of Partnership purchasers) have used
    their long-term care insurance policies and only about 90 people have
    actually accessed Medicaid (0.5 percent of total purchasers). It is
    unclear whether these persons using Medicaid would have likely spent
    down to Medicaid absent their participation in the program. It is not
    clear whether the policies were purchased by people who otherwise would
    not have bought insurance, whether the Partnership policies are a
    substitute for other long-term care insurance policies, and whether
    participants would have used Medicaid regardless. Because Partnership
    policyholders tend to be younger than other long-term care
    policyholders, it may be hard to assess the full impact of the
    Partnership program on Medicaid. It is possible that not enough time
    has passed for many Partnership policyholders to have exhausted their
    long-term care insurance policy and become eligible for Medicaid.
        The Partnership states use three different methods to determine the
    amount of assets that will be protected for program participants: a
    dollar-for-dollar model, a total assets model, and a hybrid model.
    California and Connecticut use the dollar-for-dollar model that
    protects $1 in assets for every $1 in benefits paid out by the
    Partnership policy. New York uses a total assets approach where all of
    an individual's assets are protected if the individual purchases a
    Partnership policy with a minimum benefit package defined by the state
    and exhausts all of its benefits. New York is considering expanding its
    model to include a hybrid model. Indiana uses a hybrid model in which
    the amount of asset protection depends on the value of the benefits
    exhausted. To qualify for total asset protection, participants must
    exhaust a policy that covers about 4.2 years of nursing home care. Any
    policy with a benefit value below this amount would provide dollar-for-
    dollar protection. Partnership participants in California, Connecticut,
    and Indiana who have qualified for Medicaid have protected a total of
    $2.8 million in assets, according to recent studies.
        According to a recent report by the Congressional Research Service
    on the program, the income and asset levels of Partnership program
    participants vary. Almost half of Partnership purchasers in California
    and Connecticut have assets of greater than $350,000 and 60 percent of
    purchasers in Indiana also have assets greater than this level (all
    excluding the home). An average of 20 percent of purchasers in
    California and Connecticut has assets of less than $100,000 (excluding
    the home). In New York, 13 percent have assets between $50,000 and
    $200,000. The dollar-for dollar-model allows states to approve more
    affordable options for lower-income consumers, while total asset
    protection encourages states to approve policies that are higher in
    value and more attractive to people with higher incomes. A significant
    number of participants in California and Indiana, 58 percent and 43
    percent respectively, have monthly incomes that exceed $5,000. Yet more
    than half of purchasers in Connecticut (57 percent) have income less
    than $2,500. In Indiana, 17 percent of purchasers had monthly income
    less than $3,000, 34.5 percent had monthly income between $3,000 and
    $5,000, and 43 percent had income of greater than $5,000.
        Partnership programs may offer another option for financing long-
    term care but several improvements need to be made. These improvements
    include:

     Protecting the Medicaid safety net for low-income people who need
            long-term care. The Partnership may increase Medicaid long-term
            care expenditures if people with significant assets are able to
            access Medicaid more easily. If this occurs and states are
            unwilling or unable to spend more on Medicaid, additional
            beneficiaries could reduce the resources available to
            impoverished people who need care.
     Requiring stronger consumer protections, particularly nonforfeiture
            and inflation protection, premium stability, and clear
            disclosure of current income requirements for Medicaid benefits
            and the state's right to change those requirements. As
            discussed earlier, consumer protections are very important to
            long-term care policies. Partnership participants need to also
            be clear on the Medicaid income requirement and that it is a
            requirement that they must meet for Medicaid eligibility after
            they have exhausted their long-term care policy.
     Guaranteeing the types of services (particularly home-and community-
            based services) that the state would provide to eligible
            Partnership policyholders under Medicaid. Most current
            Partnership policyholders will not need long-term care for many
            years. Without this protection they have no assurance that the
            services covered by Medicaid today will be covered in the
            future.
     Requiring that states monitor admissions to nursing homes to ensure
            that equal access is available to everyone on the waiting list,
            regardless of source of payments. Nursing homes should not be
            able to discriminate against residents based on who is paying
            for their care.

                                   CONCLUSION

        We can no longer afford to put the issue of long-term care
    financing on the back burner. Congress must begin to look for options
    that would allow Americans to pay for the care they need in the setting
    of their choice. We urge you to focus on the people behind the policy
    discussion of new financing options and budget implications--the faces
    of families struggling to help a grandparent with Alzheimer's or a
    parent with physical limitations, and the faces of older Americans
    interested in staying independent and in their own homes for as long as
    possible.
        AARP looks forward to working with this Committee, Congress, the
    Administration, and all stakeholders to address the broad long-term
    care needs our country is facing. We stand ready to work with members
    on both sides of the aisle to begin to tackle this important challenge.

        Mr. Deal. Thank you. Dr. Feder.

                        STATEMENT OF JUDITH FEDER

        Ms. Feder. Thank you, Mr. Chairman, and stalwart members of
    the committee. I appreciate the opportunity to participate in
    this hearing on such a critical issue, and I am sure I share
    with many people involved in long-term care work that we are
    pleased to see long-term care financing on the policy agenda.
        However, as I hear the discussion, both today and more
    broadly, about long-term care and future policy, I am concerned
    about some distortion in that discussion. We hear enormous
    enthusiasm for private resources and private insurance as the
    foundation for future public policy toward long-term care
    financing, including proposals even to invest public dollars in
    supporting the private insurance.
        On the other hand, we hear enormous skepticism about and
    even denigration of the capacity and desirability of public
    programs to meet long-term care needs, including proposals that
    would withdraw extremely important financing for long-term
    care. Based on 30 years of research and experience, and a
    review of the evidence, I can tell you that that perspective
    has the issue exactly backwards.
        Private resources, both in caring and in dollar and private
    long-term care insurance have important roles to play in future
    financing for long-term care, but if we are to promote
    equitable, affordable access to long-term care when people of
    all ages need it, greater investment in public programs,
    whether through Medicaid or new social insurance, is absolutely
    essential.
        Let me elaborate. I want to begin by emphasizing the
    importance of insurance. Insurance is the mechanism that we use
    to spread the risk of unpredictable catastrophic events, rather
    than allowing the costs to fall so overwhelmingly on the
    minority who experience financial catastrophe. Long-term care,
    intensive long-term care, is one such catastrophic event. It is
    clearly unpredictable for the close to 40 percent of the long-
    term care population who are under the age of 65, but it is
    also unpredictable for people at retirement age, 30 percent of
    whom are estimated to die without needing any long-term care,
    while 20 percent of them are estimated to need more than 5
    years of care.
        Reliance on savings to deal with a catastrophic risk leaves
    the burden concentrated on those who experience it, even if it
    is handled by cashing out houses, as we would do with reverse
    annuity mortgages. And even when people have housing assets,
    research studies call into question whether seniors should
    sacrifice so much housing value in interest costs and other
    payments to banks, and whether these bank finance loans are
    preferable, or more precisely, less costly to Medicaid than
    estate recovery, which is already a provision of current law.
        Now, let me turn to the risk spreading through insurance.
    The next question I would ask is why is private insurance so
    limited a vehicle, and there are several reasons. It is not
    available to people who need long-term care now, and the
    problem is now, not just in the future. It is not priced to
    serve the younger population that is also at risk. It is not
    affordable to significant segments of the older population,
    both now and in the future, and I would remind us that the
    median household income of elderly Medicare beneficiaries is
    $25,000. Its benefits are often limited in an effort to keep
    premiums more affordable, and its premiums may be unstable,
    leaving purchasers still at risk of substantial expenses even
    if they hold insurance. With appropriate standards or
    protections, private long-term care insurance may be fine for
    the better off population, but policies that would use taxpayer
    dollars to subsidize it represent misplaced priorities, and in
    my view, misplaced investment of those dollars.
        First, partnerships which rely on Medicaid to subsidize a
    time-limited insurance benefit remain expensive to modest
    income people, may substitute for insurance that they would
    have bought on their own, and according--because of this,
    according to CBO, may cost rather than save Medicaid money.
    Second, tax credits for the purchase of long-term care
    insurance would clearly cost new taxpayer dollars, and would
    also be targeted to the better off older population who can
    take care of themselves. Third, and most distressing, proposals
    to cut back Medicaid to force people to purchase private long-
    term care insurance are simply unconscionable, and as CBO
    recognizes in discussing such proposals, would likely leave
    many people without any protection or access at all.
        Evidence on actual behavior shows that it is not Medicaid
    limitations that are the primary barrier to--excuse me,
    Medicaid, that is the primary barrier to the purchase of long-
    term care insurance. Rather, it is many other factors, some of
    which I and others have discussed.
        Now, the public role. Medicaid is our Nation's long-term
    care safety net. Its costs are high, not because it is serving
    the wrong population, but because serving the large numbers of
    people who need long-term care and cannot afford it is
    expensive. Remember, Medicaid is a public-private partnership.
    Beneficiaries give up virtually everything they have to receive
    Medicaid benefits. The argument that the bulk of Medicaid
    resources go to people who are able to pay for their--on their
    own, and who transfer their assets is not supported by the
    evidence, and the evidence tells us that most elderly likely to
    need long-term care have too little income and assets to
    warrant transfer, especially if they are disabled. People in
    poor health are more likely to conserve their assets than to
    exhaust them. Among all the elderly, transfers that do occur
    are typically modest, less than $2,000, and for those seeking
    Medicaid eligibility, they are not significant contributors to
    Medicaid costs, and the fact is that most elderly nursing home
    users pay most or all of their costs of the care.
        Making Medicaid meaner is likely to save Medicaid little,
    and punishing modest income people unlucky enough to need long-
    term care before they die, while preserving the estates of the
    wealthiest Americans and everyone else is just plain unfair.
    Today's Medicaid provides not too much but too little
    protection, focusing on nursing homes, not home care, or more
    than home care. Eligibility and benefits vary tremendously
    across States, and as we have heard, States are struggling with
    today's fiscal burdens, let alone what they will have to deal
    with in the future.
        As the Governors regularly tell us, they need more, not
    less, in Federal resources to do the job. Additional Federal
    commitment will not replace personal responsibility or personal
    contributions to financing long-term care or to care giving.
    Those we will all do always. Nor will it bankrupt the Nation.
    To argue that the Nation cannot afford this commitment confuses
    affordability with distribution--somebody has to pay--and
    confuses affordability with policy choice. Choices Congress is
    currently making, the choice not to tax the baby boom
    generation, my generation, in the peak of our earning years,
    and choices to incur enormous debt to finance the Federal
    Government, these choices are robbing the Nation of our
    ability, through taxes on a growing, a growing, not a shrinking
    economy, to serve all our citizens, old and young, fairly and
    effectively.
        We can make better choices, and I hope we will. Thank you.
        [The prepared statement of Judith Feder follows:]

      Prepared Statement of Judith Feder, Professor and Dean, Georgetown
                 Public Policy Institute, Georgetown University

        Chairman Deal, Ranking Member Brown, and members of the Committee,
    I'm pleased to have the opportunity to testify before you today on
    long-term care. My testimony will reflect more than twenty-five years
    of research experience in long-term care, at Georgetown University and,
    before that, the Urban Institute. Based on that research, my policy
    conclusions are the following:

     Today, 10 million people of all ages are estimated to need long-term
            care, close to 40 percent of whom are under the age of 65.
            Among the roughly 8 million who are at home or in the
            community, one in five report getting insufficient care,
            frequently resulting in significant consequences--falling,
            soiling oneself, or inability to bathe or eat.
     The need for long-term care is unpredictable and, when extensive
            service is required, financially catastrophic--best dealt with
            through insurance, rather than personal savings. But the nation
            lacks a policy that assures people of all ages access to
            quality long-term care when they need it, without risk of
            impoverishment.
     Private insurance for long-term care is expanding and will play a
            growing role in long-term care financing. However, even with
            improved standards and special ``partnerships'' with Medicaid,
            it does nothing for those currently in need, is not promoted as
            a means to serve the under-65 population and, in the future
            will be affordable and valuable for only a portion of the older
            population--most likely, the better off.
     Medicaid is the nation's only safety net for those who require
            extensive long-term care. Rather than serving primarily as a
            deterrent to the purchase of private insurance, it serves
            overwhelmingly to assure access to care for those least able to
            afford that insurance. But its invaluable services become
            available only when and if people become impoverished; its
            protections vary substantially across states; and, in most
            states, it fails to assure access to quality care, especially
            in people's homes.
     A growing elderly population will mean greater demand on an already
            significantly stressed Medicaid program, squeezing out states'
            ability to meet other needs and, at the same time, likely
            reducing equity and adequacy across states.
     Policy ``solutions'' that focus only on limiting public obligations
            for long-term care financing do our nation a disservice.
            Although individuals and families will always bear significant
            care-giving and financial responsibility, equitably meeting
            long-term care needs of people of all ages and incomes--
            throughout the nation--inevitably requires new federal policy
            and a significant investment of federal funds.
        The following will lay out inadequacies in current long-term care
    financing; the implications of growth in the elderly population for
    future inadequacies; and the importance of federal policy to sustain
    and improve long-term care protection. Unless otherwise noted, I am
    drawing on research from the Georgetown Long-term Care Financing
    Project, funded by the Robert Wood Johnson Foundation, and available at
    our web site: ltc.georgetown.edu. The opinions I present are, of
    course, only my own.
        People who need extensive assistance with basic tasks of living
    (like bathing, dressing and eating) face the risk of catastrophic costs
    and inadequate care. Today, almost 10 million people of all ages need
    long-term care. Only 1.6 million are in nursing homes. Most people
    needing long-term, especially younger people, live in the community.
    Among people not in nursing homes, fully three quarters rely solely on
    family and friends to provide the assistance they require. The range of
    needs is considerable--with some people requiring only occasional
    assistance and others needing a great deal. Intensive family care-
    giving comes at considerable cost--in employment, health status and
    quality of life--and may fail to meet care needs. Nationally, one in
    five people with long-term care needs who are not in nursing homes
    report ``unmet'' need, frequently resulting in significant
    consequences--falling, soiling oneself, or inability to bathe or eat.
    The cost of paid care exceeds most families' ability to pay. In 2002,
    the average annual cost of nursing home care exceeded $50,000 and 4
    hours per day of home care over a year were estimated to cost $26,000.
    Clearly, the need for extensive paid long-term care constitutes a
    catastrophic expense.
        The likelihood of needing long-term care is also unpredictable.
    Although the likelihood increases with age, close to 40 percent of
    people with long-term care needs are under the age of 65. And the need
    for care among the elderly varies considerably. Over a lifetime,
    projections of people currently retiring indicate that about 30 percent
    are likely to die without ever needing long-term care; fewer than 17
    percent are likely to need one year of care or less, and about 20
    percent are likely to need care for more than five years.
        Because long-term care needs are unpredictable and may be
    financially catastrophic, insurance is the most appropriate financing
    strategy. Reliance on savings alone is inefficient and ineffective.
    People will either save too much or too little to cover expenses.
    However few people have adequate private or public long-term care
    insurance. Although sales of private long-term care insurance are
    growing (the number of policies ever sold more than tripled over the
    1990s), only about 6 million people are estimated to currently hold any
    type of private long-term care insurance. Growing numbers of older
    people, especially of the segment with significant resources, will
    create the potential for substantial expansion of that market. But
    private long-term care insurance policies remain a limited means to
    spread long-term care risk. Private long-term care insurance

     Is not available to people who already have long-term care needs;
     Is not designed to meet the needs of younger people who are also at
            risk of needing long-term care;
     Is not affordable to the substantial segment of older persons, now
            and in the future, with low and modest incomes;
     Limits benefits in dollar terms in order to keep premiums affordable,
            but therefore leaves policyholders with insufficient protection
            when they most need care; and
     Lacks the premium stability and benefit adequacy that can assure
            purchasers who pay premiums year after year that it will
            protect them against catastrophe.
        We need only look at experience in health insurance to recognize
    that reliance on the individual market--plagued by risk selection, high
    marketing costs, benefit exclusions, and other problems--for long-term
    care will be grossly inadequate to assure adequate protection to most
    people.
        Current public policy also falls far short of assuring insurance
    protection. Medicare, which provides health insurance to many who need
    long-term care, covers very little long-term care. Its financing for
    nursing home care and home care is closely tied to the need for acute
    care and is available for personal care only if skilled services--like
    nursing and rehabilitation therapy--are also required.
        It is Medicaid that provides the nation's long-term care safety
    net. Most nursing home users who qualify for Medicaid satisfy
    Medicaid's income and asset eligibility requirements on admission. But
    16 percent of elderly nursing home users begin their nursing home stays
    using their own resources and then become eligible for Medicaid as
    their assets are exhausted. Because the costs of long-term care are so
    high relative to most people's income and resources, the opportunity to
    ``spend down'' to eligibility--spending virtually all income and assets
    in order to qualify--is essential to assure access to care. Some have
    labeled impoverishment a ``fallacy'', arguing that the bulk of Medicaid
    resources go to finance nursing home care for people who could afford
    to pay for themselves, but who ``transfer'' their resources in order to
    qualify for Medicaid benefits. Such exaggeration relies on anecdote,
    not evidence. Indeed, the evidence shows that few of the elderly have
    the income or wealth that would warrant such transfer; that people in
    poor health are more likely to conserve than to exhaust assets; that,
    for the elderly population as a whole, transfers that occur are
    typically modest (less than $2000); and that transfers that are
    associated with establishing eligibility are not significant
    contributors to Medicaid costs.
        Further, there is little evidence to support the argument that
    Medicaid's availability is a substantial deterrent to the purchase of
    long-term care insurance (CBO, ``Financing Long-term Care for the
    Elderly,'' April 2004). This argument is based far more on theoretical
    assumptions than on empirical analysis of people's actual behavior.
    Indeed, analysis of actual purchases of private long-term care
    insurance found no impact on purchase decisions among older workers and
    found the slight impact on purchasers over age 70 too small to explain
    the very low proportion of elderly holding policies (Frank A. Sloan and
    Edward C. Norton. 1997. ``Adverse Selection, Bequests, Crowding Out and
    Private Demand for Insurance: Evidence from the Long-Term Care
    Insurance Market, Journal of Risk and Uncertainty 15, no.3: 201-219).
        Despite Medicaid's essential role, however, its protections differ
    considerably from what we think of as ``insurance''. Medicaid does not
    protect people against financial catastrophe; it finances services only
    after catastrophe strikes. Further, Medicaid's services fall far short
    of meeting the needs and preferences of people who need care.
    Medicaid's benefits focus overwhelmingly on nursing home care--an
    important service for some, but not the home care services preferred by
    people of all ages. In the last decade, Medicaid home care spending has
    increased from 14% to 29% of Medicaid's total long-term care spending.
    But nursing homes still absorb the lion's share of Medicaid's support
    for long-term care.
        Medicaid protection also varies considerably from state to state.
    As a federal-state matching program, Medicaid gives states the primary
    role in defining the scope of eligibility and benefits. A recent Urban
    Institute analysis emphasized the resulting variation across states in
    service availability as a source of both inequity and inadequacy in our
    financing system. In an examination of 1998 spending in 13 states,
    long-term care dollars per aged, blind, or disabled enrollee in the
    highest spending states (New York and Minnesota) were about 4 times
    greater than in the lowest (Alabama, Mississippi)--a differential even
    greater than that found for Medicaid's health insurance spending for
    low income people.
        Both our own research and that conducted by the Government
    Accountability Office tells us that differences in state policies have
    enormous consequences for people who need long-term care. Studies
    comparing access for individuals with very similar needs in different
    communities show that people served in one community get little or no
    service in another. Georgetown research finds that the same person
    found financially eligible or sufficiently impaired to receive Medicaid
    services in one state might not be eligible for Medicaid in another--
    and, if found eligible, might receive a very different mix or frequency
    of service. And a comparison of use of paid services in 6 states finds
    almost twice the incidence of unmet need (56%) in the state with the
    smallest share of people likely to receive paid services as in the
    state with the largest (31%).
        This variation--as well as ups and downs in the availability of
    benefits over time--undoubtedly reflects variation in states'
    willingness and ability to finance costly long-term care services. The
    recent recession demonstrated the impact on states of changes in their
    economies and the vulnerability of Medicaid recipients to states'
    reactions. In 2001, Medicaid accounted for 15% of state spending, with
    long-term care responsible for 35% of the total. Virtually all states
    were cutting their Medicaid spending as budget pressures struck,
    endangering access either for low income people needing health
    insurance, older or disabled people needing long-term care, or both.
        In sum, under current policy, neither public nor private insurance
    protects people against the risk of long-term care. Despite Medicaid's
    important role as a safety net, the overall result for people who need
    care is catastrophic expenses, limited access to service, and care
    needs going unmet.
        Given inequities and inadequacies in our current approach for long-
    term care, it is no wonder that we are concerned about the future, when
    a far larger proportion of the nation's population will be over age 65
    than are today. Experts disagree on whether disability rates among
    older people in the future will be the same as or lower than they are
    today. But even if the proportion of older people with disabilities
    declines, the larger number of older people will likely mean a larger
    number of older people will need long-term care in the future than need
    it today. The population aged 85 and older, who are most likely to have
    long-term care needs, is likely to double by 2030 and quadruple by
    2050.
        States will vary in the aging of their populations--with resulting
    differences in the demand for long-term care and the ability of their
    working-aged population to support it. To identify future demands on
    Medicaid, a Georgetown study examined census data on the ratio of
    elderly people to working-age adults between 2002 and 2025. Nationally,
    this ratio changes from about one to five (one person over age 65 for
    every 5.2 people of working age) in 2002 to one to three--an increase
    of about 66 percent. But the changes differ across states, with some
    states well below the national average (e.g. California, Connecticut,
    D.C., Massachusetts) and others, far above. In many states, the ratio
    increases by more than three quarters and in a few (e.g. Colorado,
    Utah, and Oregon), it more than doubles. All states will be challenged
    to meet increased long-term care needs.
        States are already struggling with Medicaid's fiscal demands, which
    challenge their ability to meet equally pressing needs in education and
    other areas. And state revenue capacity varies considerably. If current
    policies persist, pressure to make difficult tradeoffs will only get
    stronger. In the future, states with bigger increases in the elderly-
    to-worker ratio will face the greatest pressure. And, since many of the
    states with above average changes currently spend relatively little per
    worker on Medicaid long-term care, there is a strong likelihood that in
    the future, long-term care financing will be even less equitable and
    less adequate across the nation than it is today.
        What's needed for a different future is public policy action.
    Developing better policy requires an assessment of options to assure
    access to affordable quality long-term care and to distribute financing
    equitably between individuals who need long-term care and their
    families, on the one hand, and the rest of federal and state taxpayers,
    on the other. Consideration of federal budgetary implications is an
    important part of the assessment process. But allowing budgetary
    constraints to drive that process distorts the nation's policy choices.
    Last April's CBO report on long-term care financing did precisely that.
    Explicitly focusing on the achievement of only one policy goal--
    alleviation of ``pressure'' on the federal budget--the report treated
    as legitimate only policy options with the potential to reduce federal
    spending, without regard to the consequences for people in need.
        From this perspective, the report's first set of policy options--
    cutting back already inadequate Medicaid and Medicare protection--is
    not surprising. But its implications are nevertheless horrifying. CBO
    straightforwardly states that such action could reduce the number of
    people dependent on public programs--a fairly obvious conclusion. But
    it presents no evidence that people inappropriately rely on Medicaid
    today; and no evidence that savings or private long-term care insurance
    would provide adequate protection if Medicaid were made more
    restrictive for the future. Indeed CBO explicitly recognizes that this
    approach implies greater burdens on family and friends, greater
    difficulty in obtaining care, and greater bad debt for long-term care
    providers. If the policy goal is--as it should be--to improve care and
    distribute costs equitably, such cutbacks seem unconscionable, not
    desirable.
        The CBO report's second set of options to alleviate fiscal pressure
    aim to ``improve the functioning of the market for private long-term
    care insurance''--a strategy that is less likely than public cutbacks
    to reduce access but still unlikely to significantly improve either
    access or equity. Standardizing long-term care insurance policies might
    facilitate consumers' ability to make choices in the marketplace and
    improve the adequacy of private long-term care insurance. But, as CBO
    notes, standards that improve policies would likely increase insurance
    premiums. The result might be better protection for those who can
    afford private insurance--a worthy goal, but it is highly unlikely to
    be an increase in the numbers of people willing or able to buy
    insurance.
        CBO's consideration of so-called ``partnerships for long-term
    care''--which would allow benefits paid by private insurance to offset
    (or protect) assets for Medicaid users who purchase approved private
    long-term care insurance policies--also reveals this strategy's
    limitations. These partnerships have been advocated as a means to save
    Medicaid money by preventing ``spend-down'' and asset transfers. The
    hope is that allowing the purchase of asset protection, along with
    insurance, will encourage modest income people to purchase private
    long-term care insurance. Experience with these policies in four states
    has produced only limited purchases, primarily among higher income
    people, and has affected too few people for too short a period to
    assess its impact on Medicaid spending (Alexis Ahlstrom, Emily
    Clements, Anne Tumlinson and Jeanne Lambrew, ``The Long-Term Care
    Partnership Program: Issues and Options'', Pew Charitable Trusts''
    Retirement Security Project, George Washington University and The
    Brookings Institution, December 2004). The partnership has contributed
    to improved standards for long-term care insurance policies and more
    partnership policies are being sold to more modest income people as the
    standards that apply to them are also applied to the broader market.
    However, as CBO notes, if these policies simply substitute for policies
    individuals would otherwise have purchased or increase the likelihood
    of using long-term care services, they may eventually increase rather
    than decrease Medicaid expenditures. From the budgetary perspective,
    advocacy of reliance on Medicaid to essentially subsidize private long-
    term care insurance alongside promotion of budget legislation to
    curtail federal Medicaid contributions seems both disingenuous and
    risky. Further, from the broader equity perspective, targeting private
    long-term care insurance to modest income people seems questionable.
    The purchase of a limited long-term care insurance policy could easily
    absorb close to 10 percent of median income for a couple aged 60--a
    substantial expenditure for a cohort acknowledged as woefully
    unprepared to meet the basic income needs of retirement.
        Even more questionable are proposed tax preferences for private
    long-term care insurance. CBO does not analyze these proposals, perhaps
    because they would clearly increase rather than decrease public
    expenditures. Nevertheless, they are consistently on the policy agenda,
    despite the likelihood that they will be poorly targeted to improve
    insurance protection. Experience with health insurance tells us that
    such credits are likely to primarily benefit those who would have
    purchased long-term care insurance even in the absence of credits--
    substituting public for private dollars--and, as currently proposed,
    are not even designed to reach the substantial portion of older and
    younger Americans with low and modest incomes.
        Indeed, the whole focus on reducing public spending and promoting
    private insurance ignores the public responsibility to address for all
    Americans what should be our fundamental policy choice: do we want to
    live in a society in which we assure affordable access to long-term
    care for people who need it or in a society in which we leave people in
    need to manage as best they can on their own?
        There is little question that to address both current and future
    long-term care needs requires not a decreased but an increased
    commitment of public resources--and, to be adequate and effective in
    all states--federal resources. Expanded public financing for long-term
    care could take a variety of forms and by no means need eliminate
    private contributions. One option, modeled on Social Security, would be
    to provide everyone access to a ``basic'' or ``limited'' long-term care
    benefit, supplemented by private insurance purchases for the better-off
    and enhanced public protection for the low income population. Another
    option would be establishment of a public ``floor'' of asset
    protection--a national program assuring everyone access to affordable
    quality long-term care--at home as well as in the nursing home--without
    having to give up all their life savings as Medicaid requires today.
    The asset floor could be set to allow people who worked hard all their
    lives to keep their homes and modest assets, while allowing the better
    off to purchase private long-term care insurance to protect greater
    assets. Either public/private combination could not only better protect
    people in need; it could also provide substantial relief to states to
    focus on health insurance, education and other pressing needs--relief
    that governors have explicitly requested by calling on the federal
    government to bear the costs of Medicare/Medicaid ``dual eligibles''.
    Because Medicaid serves the neediest population and, in the current
    budgetary environment is at risk, my highest priority for expenditure
    of the next federal dollar would be responding to this call (along with
    supporting more home care and better quality care) with more federal
    dollars to Medicaid.
        Some will undoubtedly characterize proposals like these as
    ``unaffordable'', given the fiscal demands of Medicare and Social
    Security and the current federal budget deficit. But that deficit
    reflects policy choices. I would far rather see expenditure of the next
    federal dollar devoted to enhanced Medicaid long-term care financing
    than to tax credits for long-term care or tax cuts in general. Indeed,
    the estate tax is especially appropriate for long-term care financing:
    taxing everyone's estate at certain levels, to provide reasonable
    estate protection for those unlucky enough to need long-term care.
        As we look to the future, examination of the choices being made by
    other nations of the world is instructive. Analysis by the Organization
    for Economic Cooperation and Development (OECD) of long-term care
    policy in 19 OECD countries (presented at the June 2004 research
    meeting of AcademyHealth) found that the number of countries with
    universal public protection for long-term care (Germany, Japan and
    others) is growing. Public protection, they report, does not imply the
    absence of private obligations (cost sharing and out-of-pocket
    spending), nor does it imply unlimited service or exploding costs.
    Rather, in general, it reflects a ``fairer'' balance between public and
    private financing--relating personal contributions to ability to pay
    and targeting benefits to the population in greatest need. Many of
    these nations have substantially larger proportions of elderly than the
    U.S. does today and therefore can be instructive to us as we adjust to
    an aging society.
        Clearly, we will face choices in that adjustment. If we are to be
    the caring society I believe we wish ourselves to be, we too will move
    in the direction of greater risk-sharing and equity by adopting the
    national policy and committing the federal resources which that will
    require.

        Mr. Deal. Thank you. Well, I think this panel has truly
    demonstrated how difficult our task is. You literally are all
    over the board in terms of perceiving the problem and certainly
    in terms of suggesting solutions.
        Let me start out with just asking a few things, and see if
    there is any consensus on anything. Okay. First of all, would
    you all agree that we should attempt to do away with the
    institutional bias, as Dr. McClellan called it.
        I see everybody pretty well--Dr. Feder, you don't agree
    with that?
        Ms. Feder. I--no, I agree with having a broad array of
    services available in Medicaid, and I believe that will require
    the investment of additional resources, and I am absolutely for
    it.
        Mr. Deal. But you acknowledge the institutional bias is
    there, and that it does do away with flexibility. All right.
    Good. Yes. Ms. O'Shaughnessy.
        Ms. O'Shaughnessy. Sorry. One thing I would like to point
    out, and I agree with the supposition about institutional bias.
    I do want to point out just something from the data, that the
    acuity level of people in nursing homes has gone up over the
    past 10 years or so, so people, many people in nursing homes
    need to be there, but as was suggested, there needs to be a
    broad array of services as well.
        Mr. Deal. Right. Mr. Moses.
        Mr. Moses. I really think it is critical to understand why
    we have an institutional bias, and that is because Medicaid
    came along in 1965, and started paying for nursing homes almost
    exclusively, which chilled the market for private financing for
    home and community-based care and insurance to pay for it. So,
    if we try to retrofit the home and community-based system on
    what we have before we control the eligibility hemorrhage, we
    are going to have an enormous problem with that woodwork
    factor, and with encouraging Medicaid planning and discouraging
    private insurance.
        Mr. Deal. Okay. Obviously, this is such a difficult issue
    to get a handle on. We range all the way from are there the
    rich people in this country who are divesting themselves to
    become eligible. I certainly agree with Mr. Krooks in this
    regard. I don't think anybody wants to be a pauper. I do think,
    as Mr. Moses points out, that there are transfers being made.
    It is sort of one of those life cycle things where, you know,
    you may not have much when you start out. You become a little
    wealthier as you work, and you accumulate, and you sort of get
    that attitude like the bumper sticker on the back of the RV
    going down the road. I am spending my grandchildren's
    inheritance. And then, you get to the point where you realize
    that you need institutional care, and it is going to consume
    everything that you have worked for, and everything that you
    have saved for, which we, as a people, have encouraged people
    to do that. We have encouraged them to save. We have encouraged
    them to buy their homes, and then all of a sudden, all of these
    are at risk. There is certainly human nature takes over, and to
    say, I am going to do whatever I can within the law and get an
    ingenious attorney to figure out what the loopholes of the law
    are, to preserve that. That is human nature, I think.
        So let us back up to another thing, and see if there is any
    consensus, and I know that Dr. Feder had some reservations
    about this one, and it is one that Ms. Ignagni, I think you
    were suggesting in your proposal, and that is, let us
    incentivize the purchase of long-term care health insurance.
    Right now, there is not any real incentive, other than the four
    States in the partnership, if you want to call that an
    incentive, and we can argue about whether that is an incentive
    or not. That is, to incentivize the purchase of long-term care
    health insurance.
        Most of us have the attitude that we are not going to need
    it, you know. And so therefore, if you don't perceive you are
    going to need anything, why buy it? It is sort of like my
    mother. I told you about when she lost her leg, and she had to
    come live with us, and she had to, she called it break up
    housekeeping, and she was crying 1 day as we were trying to
    decide where to put this and where to put that, and she says, I
    just hate to break up housekeeping, and my wife said, well, you
    know, you knew you were probably going to have to do that at
    some point, and at 92 years of age, she said but I didn't think
    I would have to do it this soon.
        You know, we are all sort of that attitude. How do we
    incentivize us to do something for ourselves. You suggested a
    tax credit. You say it is too expensive. Mr. Krooks.
        Mr. Krooks. Thank you, Mr. Chairman. We support tax
    incentives which are enacted to encourage consumers to purchase
    long-term care insurance, incentives that are coupled with
    caregiver tax credits, because I think, as we have all
    recognized, the lion's share of care in this country is
    delivered by informal caregivers, and it is just unfair not to
    offer a tax credit. People are giving up their jobs, taking
    time off from work.
        Mr. Deal. Those are the ones I feel sorry for.
        Mr. Krooks. Yeah. The current system is flawed in terms of
    incentivizing people to purchase long-term care insurance. I am
    not sure that people do anything because of tax reasons. I
    don't think the tax tail wags the dog, but certainly, under
    current law, when your insurance premiums are deductible as a
    miscellaneous itemized medical expense, which means that they
    are only deductible to the extent all of your medical expenses
    exceed 7.5 percent of adjusted gross income, many people don't
    qualify.
        Mr. Deal. Right.
        Mr. Krooks. What we need to do, and what we have done in
    other States and in my home State, is offer a dollar for dollar
    tax credit, so if you buy a long-term care insurance policy,
    and it is $2,000, as Mr. Burgess stated, then you get a $2,000
    tax credit. I think that that will go a long way. Although I
    think we do need to recognize that although we are supportive
    of long-term care insurance, not everyone is going to qualify.
    There is a whole generation of people who are 60 plus, 70 plus,
    who the insurance companies, they don't want them. They want
    me. The problem is, I have got four kids who I have got to
    provide college for. I have got 401(k) plan that is half of
    what it was before the year 2000, and you know, I have got my
    own issues. So we need to incentivize the insurance companies
    to insure seniors and people with disabilities, people with MS,
    because these people are going to have no other choice other
    than to go on Medicaid.
        Mr. Deal. Let me ask Ms. Ignagni to respond. And I am going
    to have to cut it off with those responses, and maybe we will
    get a second round if everybody leaves, and I get back to
    myself. Yes, ma'am.
        Ms. Ignagni. Thank you, Mr. Chairman. You made a very
    important point. A No. 1 issue that we found in our surveys
    with respect to reluctance to purchase is the denial issue. So
    we clearly need more education. People are confused about what
    Medicare covers, in particular. A number of individuals,
    particularly baby boomers, think that Medicare will cover long-
    term care. They don't plan ahead. The lack of a tax incentive.
    We agree with Mr. Krooks. You need an above the line. You also
    need the caregiver credit, for the reasons that he very aptly
    articulated. Also, the flexible benefits issue. We know that a
    number of individuals, in the context of their employee
    situation, would like to devote pretax dollars to the purchase
    of long-term care. That is not permissible now. Section 125
    accounts, that is not permissible. So, those are very important
    issues that could be taken to start us moving toward this very
    productive response and strategy.
        Mr. Deal. If we don't get all the responses right now, we
    will come back to you, if somebody else doesn't ask a similar
    question. Mr. Strickland, I will let you next.
        Mr. Strickland. Thank you, Mr. Chairman.
        And I would like to begin my questioning by yielding some
    time to Dr. Feder, in case she would like to respond to what
    you have just said. Dr. Feder?
        Ms. Feder. Thank you, Mr. Strickland.
        I just would say that the tax, when you talk about these
    kinds of tax credits and incentives, unless these tax credits
    are designed to be deductible, they only go to the higher
    income segment of society. Several of you members have said
    they are buying long-term care insurance. That is a fine thing
    for people to do, but essentially, this whole hearing is about
    concerns that we--that some think we don't have enough public
    resources. If that is the case, to invest those resources in
    the upper end, at the upper end of the income stream seems to
    me an outrage.
        Mr. Strickland. So, Dr. Feder, are you--if I can try to say
    what you have said, you are saying that these proposed
    solutions may benefit those who may be the least in need----
        Ms. Feder. Absolutely.
        Mr. Strickland. [continuing] and the most able to deal with
    their long-term care needs without public assistance. So, thank
    you. Ms. Stucki, I noticed in your testimony that you said
    there is about $2 trillion available in home equity from the 20
    million, or estimated 20 million elderly households in the
    Nation. However, I think it would be helpful and useful for us
    to understand that the portion of that number that would
    realistically yield Medicaid money for long-term services. For
    example, Mark Merlis, I understand, at the Georgetown
    University's Long-Term Care Financing Project, did a study, and
    he focused on Medicaid or near-Medicaid households who had home
    equity that would be eligible for a federally backed reverse
    mortgage. Now, when you narrow in on the target population,
    Merlis estimated that out of that theoretical $2 trillion, only
    about $4.2 billion would have been available in the year 2000,
    and the question I have for you is do you agree that this is a
    reasonable estimate of what Medicaid could actually save?
        Ms. Stucki. Our estimates, if we look at--we are looking
    into the future, and he looked to the past. But our estimates
    are in the neighborhood of about $3 to $5. If we focus
    specifically on Medicaid, folks who are imminently likely to
    use Medicaid. So, I think we are pretty much in the same
    ballpark.
        Mr. Strickland. In the ballpark, of----
        Ms. Stucki. Yeah.
        Mr. Strickland. [continuing] somewhere in the range of $3
    to $5 billion.
        Ms. Stucki. Right. One thing that we have emphasized very
    much in our report is that we are talking about aging in place,
    and has been pointed out in other discussions, that is more
    than just paying for supportive services. It also means paying
    for appropriate housing, home repairs, transportation, and many
    other kinds of things that oftentimes are not taken care of
    under our current system, and when we look at the larger
    numbers that we have put on the table, what that reflects is
    the opportunities to help fill the gaps in our current
    financing. Right now, a person may be able to receive services
    through various programs to help them with personal care, but
    nothing to help them fix the roof, and you can't live at home
    if you don't have that----
        Mr. Strickland. [continuing] can't fix the roof.
        Ms. Stucki. Yeah, maybe something as simple as that. So,
    what a reverse mortgage enables a person to do is manage their
    assets. It helps fill the gaps in their financing. Even with a
    long-term care insurance policy, even if they need somebody to
    help with groceries. An insurance policy doesn't kick in until
    you are very severely impaired. The equity in your home can
    help fill that gap and help avoid a cash crunch.
        Mr. Strickland. Okay. If I--thank you for your answer, and
    if I can just follow up with Dr. Feder. Dr. Feder, the thing
    that is most intriguing to me about all the talk about using
    reverse mortgages to save Medicaid money is that Medicaid
    already has the ultimate claim on the home equity of people who
    receive long-term care. Now, creating incentives, this is
    related to what we were talking about earlier, incentives for
    people to use reverse mortgages before they get on Medicaid
    just creates a lien on the home by a bank instead of Medicaid,
    as it is under current law.
        So, in the end, is it possible that Medicaid could actually
    lose money. I would like your response, please.
        Ms. Feder. Short answer is absolutely yes. This is
    essentially they would be, the dollars would be going to
    finance these loans, pay interest to banks. And under current
    law, Medicaid has full access to recover the house.
        Mr. Strickland. And so, based on information that has been
    available to me, it appears that reverse mortgages could
    perhaps yield something like 60 percent of what Medicaid could
    eventually receive through estate recovery, so it is defeating
    what we hope to accomplish, it seems.
        Ms. Feder. I think that is absolutely correct.
        Mr. Strickland. Mr. Chairman, my time is up. I yield back.
        Mr. Deal. Mr. Buyer.
        Mr. Buyer. Mr. Moses, are you--do you know what the States
    are doing out there, in regard to going after people's assets,
    and their homes. Are they being aggressive on recapture?
        Mr. Moses. Well, I have done quite a few studies in
    individual States over the years. There is a variance between
    how aggressive they are, in terms of the eligibility
    constraints on the front end. Just to speak to the issue of
    estate recoveries, those are not particularly aggressively
    enforced. It is not--it is kind of a politically sensitive
    issue. I would just observe that Dr. Stucki said 82 percent of
    seniors own their homes. Once they are on Medicaid, the best
    State I have seen is only about 14 percent own their homes, and
    we have no idea what happened to those assets. So, there is
    very little to be captured out of the estates, and that is a
    kind of punitive, after the fact approach that occurs when it
    is too late for people to do anything. That is why it is so
    important to convey the message up front that Medicaid is a
    program for the needy, and that others should take personal
    responsibility, and either have insurance or tap that equity in
    the home.
        Mr. Buyer. Mr. Moses, Ms. Feder states in her written
    testimony the suggestion that Medicaid planning is widespread
    is an ``exaggeration,'' which ``relies on anecdote, not
    evidence.'' She also states ``there is little evidence to
    support the argument that Medicaid's availability is a
    substantial deterrent to the purchase of long-term care
    insurance.'' What is your opinion with regard to her comments?
        Mr. Moses. Well, as I explained in my formal remarks, there
    is very little empirical evidence of how widespread this is.
    But my goodness, all you have to do is open your eyes. Go on
    the Internet, Google Medicaid planning, and find 1.3 million
    cases of it. Open the newspaper, and see a program for people
    on how to shelter and protect their assets. My heavens, I have
    hundreds and hundreds of quotes and dozens of reports that we
    have done. I have quotes from eligibility workers, who are
    extremely frustrated having to act as, in essence, free
    paralegals to attorneys who are constantly calling, you know,
    ``looking for loopholes.'' So, there is--where there is smoke,
    I guess, I am pretty confident there is a good bit of fire
    here, and if we could just get somebody to do a serious study,
    look at a valid random sample of cases, and project that to the
    Nation, you would have the hard evidence.
        Mr. Buyer. Yeah. I--Ms. Feder, I just don't agree with your
    statement. I practiced law in a little, small town, solo law
    practice, and I was surprised at the number of the clients, and
    they are not the wealthy, they have got a small business, or
    they are trying to shelter their income. They were trying to
    get some inheritance to their kids, and that is happening out
    there. So I just want you to know it is a reality that we are
    trying to face with, and so, you know, do we allow a Medicaid
    program where individuals are permitted to shelter and transfer
    their assets so they can pass it on to their children, and
    then, the ultimate question is, what impact is that going to
    have on the program, and being able to take limited dollars to
    real, you know, people who--in need. And that is really what we
    are struggling with here. I mean, let us just be upfront with
    everyone. And so, I just want to share that with you, with
    regard to your statements and how I feel.
        I want to turn to the gentleman from Paralyzed Veterans.
    Your comments, in your statement, you say well, almost all PVA
    members rely on the Department of Veterans Affairs for
    healthcare and support services. Potential changes to the VA
    systems may have ramifications for other Federal programs such
    as Medicaid. Like what? What potential changes are going to
    happen in the VA that are going to have ramifications on
    Federal programs?
        Mr. Page. Well, if most of our members are spinal cord
    injured veterans, and PVA, along with the other branches of the
    Veterans Service Organization recommended the independent
    budget that we submit to the House Veterans Affairs Committee
    on healthcare, and from what I understand, the Veterans Affairs
    Committee has not reported out the budget, that looks like it
    is going to be a $2 billion shortage fund----
        Mr. Buyer. Sir, wait a second. Time out. Mr. Page, you said
    that there are potential changes to the VA system are going to
    have ramifications on Medicaid. I chair this full committee. I
    know of no, zero, zip, none, changes now or even in the future
    that may have ramifications----
        Mr. Page. What----
        Mr. Buyer. [continuing] on Medicaid, so please----
        Mr. Page. What I might mean in that category would be more
    people that would be eligible for VA would be either turned
    away from VA, and have to fall back onto other public programs,
    such as Medicaid or Medicare.
        Mr. Buyer. Sir, it was the majority of the Republicans here
    in Congress that opened up the access that brought many of the
    special needs veterans into the program, and out of that
    system. We are placing the priority upon your members, and are
    taking care of your members. I just want you to know that I am
    very bothered that you would put a statement in there like
    this, when in fact, we have made you the priority. So please I
    want to take that back. I would be more than happy to revisit
    with you, but I am really bothered that you would put some type
    of a straw man that you get to knock down before this
    committee, which in fact is false. So I would be more than
    happy to work with you. I yield back.
        Mr. Deal. Dr. Burgess.
        Mr. Burgess. Thank you, Mr. Chairman. Well, unfortunately,
    Mr. Strickland is gone, but he asked the question, I think to
    you, Dr. Feder, will Medicaid lose dollars through reverse
    mortgages, and your answer was that is a correct statement.
        Ms. Feder. What he asked was whether, relative to the
    capacity to get the full value of that--or the full--recover
    the full expenses by having access to the full value of the
    house, as under current law, whether--if a reverse annuity
    mortgage had been in place, then the full value of the house
    would not be available, and that is what I said could cost
    Medicaid, could mean there was less to go to Medicaid than is
    currently available.
        Mr. Burgess. Okay. I like the concept of a reverse
    mortgage. I don't know if I like it as far as paying for
    Medicaid, but I do like the concept of aging in place. I think
    if you age in place, you are likely to die in place, though I
    don't have any hard data that says that. And I think that is a
    more economical way to go, no pun intended. But Mr. Moses, you
    looked particularly pained when Mr. Strickland asked Ms. Feder
    that question, and it looked like you wanted to respond, so let
    me give you an opportunity to respond to that.
        Mr. Moses. Well, thank you. I already did, tangentially,
    but the point is people don't retain their homes long enough
    for Medicaid to recover them, even if the States were
    aggressive, and the Federal Government required them to enforce
    even the Federal laws that are in place. It just doesn't
    happen, according to the studies that I have done. That is why
    82 percent of seniors overall can own their homes, but by the
    time they are on Medicaid, most of that home equity is gone. I
    did a study in Nebraska a couple of years ago, and what we
    found is while there was very little evidence of egregious
    Medicaid planning, like what we have talked about today, people
    routinely, in the course of estate planning, transfer their
    assets, ownership of the farm or the small business, to the
    next generation, around their late 60's, early 70's, never
    intending to qualify for Medicaid for their long-term care. But
    a decade goes by, all of a sudden, mom needs nursing home care.
    The family can't handle it, because everybody is working now,
    and voila, eligible for Medicaid, and nothing to recover out of
    the estate.
        Mr. Burgess. Thank you. I think that is worth repeating.
    Ms. Ignagni, the question comes up, and I think you addressed
    it in some regard, about why more people aren't purchasing
    long-term care insurance. I said for the record that I had. I
    didn't do that because of legislation. I didn't do that because
    of a tax break. Again, I did that because my mother told me to
    do it, and it was good advice 5 years ago, and I think it would
    be good advice today. But why aren't more people buying long-
    term care insurance?
        Ms. Ignagni. I think, Dr. Burgess, there are several
    reasons. One is that people are generally not thinking ahead.
    They are in denial, particularly about care that--conditions
    that might incapacitate them. So that is No. 1. No. 2, I think
    that there is very little information broadly about whether or
    not the Medicare program covers long-term care. We find that
    repeatedly in our studies. Third, you want to encourage the
    purchase at a time when it is most affordable, so the employer
    vantage point is particularly productive in that regard. And we
    are seeing that by far, employees would like to purchase, but
    the barrier of not having tax subsidies for flexible benefit
    purchase, 125 purchases, and through the kinds of accounts that
    people routinely decide how they want to dedicate their assets,
    that really holds back the middle class. It doesn't restrain or
    constrain folks who have a great deal of income on the high
    end, but we are really constraining the middle class from
    thinking ahead.
        A final point on your question to Dr. Feder and Mr. Moses,
    with respect to reverse mortgages. One thing that hasn't been
    said all day, or observed, as individuals are, appropriately,
    we think, excited about the potential to put new assets on the
    table, is that how far will those assets go if you don't try to
    purchase long-term care insurance with those assets. If the
    average cost of a nursing home stay is $70,000, and if Mr.
    Krooks' example is any suggestion of the modal value of a home
    today, then 2 years in a nursing home would cost $140,000. So
    even when we talk about an individual purchasing at arguably
    the most expensive time, or purchasing long-term care, it is
    prudent to begin to think about, also, that concept, with the
    idea of stretching the resources to make them go farther. And
    we would like to very much in--be involved in those discussions
    with the committee.
        And that applies to the partnership concepts, in terms of
    what we can learn from what is out there in the market, and how
    we can extend those to a 50 State partnership program.
        Mr. Burgess. Right. And I may have been out of the room
    when he talked about partnerships, but that seems to me,
    greater than tax credits, that seems to me to be a vehicle to
    get people to think about long-term care insurance. Here is a
    way to--a legitimate way to shelter your assets. Buy the
    insurance policy up front, those assets are protected up to the
    extent of your long-term care policy.
        Ms. Ignagni. That is right. There are 180,000 people who
    have purchased insurance under the partnership programs. Only
    89 of them have spent down to the Medicaid levels. And so that
    is important data, not to be dispositive, but to give us a
    suggestion on a range of strategies that might work together.
    And the final thing that we haven't mentioned in the last few
    minutes is what can be done, Governors working to stretch their
    resources in the context of the Medicaid program, we think we
    can offer strategies there to--for the folks who are at the
    bottom of the economic distribution, who are depending on
    Medicaid for a safety net. We think that there can be more done
    in the area of bringing private tools to the SSI population, et
    cetera, and we are very much involved in those discussions at
    the sate level.
        Mr. Burgess. I want to thank everyone. I know we may have
    another round of questions. I may not be able to stay. You see
    why Congressional representatives can't think in paragraphs.
        Mr. Deal. I thank the gentleman. Mr. Shimkus.
        Mr. Shimkus. Thank you, Mr. Chairman, and I want to thank
    the panel for being patient, and as I said to the other panel,
    we have some great challenges to tackle, and we ought to be--we
    shouldn't be fighting and bickering. We ought to be trying to
    find a solution, because as in the first panel, the
    demographics, they speak loudly. And we are talking about
    mandatory spending, spending that is--we have no control over,
    because of the policies that we have put in place. We have to
    spend these dollars, unless we reform it. So I think the
    chairman, who I have great respect, and I hope he appreciates--
    I loved his questions trying to--well, what do we agree upon.
    Because we have to first get there before we can address--and
    we are trying to do that with the Governors. We have a short-
    term problem, and we have a long-term problem, and we ought to
    look at--in both of those arenas, to address this. And that is
    why we have this--a lot of these different issues on the table.
    As you know, short-term, we might look at drug prices, average
    wholesale price versus average sale price. We look at the asset
    protection issue, and it is, I think, a credible issue. You
    follow the money or you follow the advertisements.
        I have a medical liability crisis in my State. And
    everybody says the insurance companies are making money hand
    over fist. Well, guess what, there is only one insurance
    company down in southern Illinois, and it is a co-op. It is a
    not for profit entity funded by docs so that they can stay in
    southern Illinois. If they were making gazillions of dollars in
    medical liability insurance, you would have people all over the
    place. So why, when you Google asset protection, Medicaid, why
    do you have thousands of ads, and we have them all here, all
    these comments about you know, how do you protect yourself, and
    how do you then protect your assets so that the government pays
    for your Medicaid care. Because they are making money on it.
    There is a demand for it, otherwise these guys would find
    another line of work. So, I find--I really get troubled by us
    not just looking at facts openly.
        Let me ask a question--I want to get one to Ms. Ignagni on
    the long-term care insurance, and anybody else can jump in,
    many of you were here for the other panel, and know that I am
    involved in the disability community. How do individuals access
    that if they are already disabled? Is there--I mean, are they
    means--not means tested, but what--I don't even know the
    terminology, but are they preexisting conditions and are--do
    they have trouble accessing this, in this environment now? And
    then, if you can do quickly, then I want to talk about long-
    term and throw something out on the table that should get
    everybody's attention.
        Ms. Ignagni. Yes, sir. Thank you for the question. There
    are two ways to access right now. One is through, as an
    individual, going to a broker, the way you would go for auto
    insurance, car insurance. And your age is looked at, your
    medical condition, and the pricing is determined. Eight
    insurers represent 80 percent of the industry, and they haven't
    had price increases, so there is a great deal of stability in
    the market, and we would be delighted to provide data.
        No. 2, there is another way to access, and this, we would
    like to see, and we have recommended strategies to encourage in
    the context of the employer group, where there is broad
    pooling, the opportunity to encourage individuals to think
    ahead and purchase, we think this would go a long way for
    working families to help supplement their savings to think
    ahead for long-term care.
        Mr. Shimkus. Illinois is a pretty successful insurance
    State. One of the reasons why is it doesn't regulate the price.
    It does regulate, it does have a State insurance commissioner.
    It does intervene, but they allow the competitive marketplace
    to be involved in setting the prices. A lot of States don't
    have that program and process. When you drive a car in the
    State of Illinois, you are mandated by law to have health
    insurance. Why not for catastrophic health--I mean automobile
    insurance, and why not for catastrophic health insurance
    coverage, or long-term care, out of the box, long-term, why
    don't we mandate everybody to have a policy? You pay it
    yourself, the business helps subsidize it, or if you are--can't
    afford it, then the government intervenes, and we use the
    taxpayer's dollars to move from a centralized market economy on
    healthcare to a competitive marketplace, which may put emphasis
    on preventative care, and options from institutional care to
    home care.
        Ms. Ignagni. Is that to me, sir?
        Mr. Shimkus. You can.
        Ms. Ignagni. Thank you.
        Mr. Shimkus. And maybe someone else may want to jump in,
    but----
        Ms. Ignagni. The issue of how we expand access, both for
    acute care services, access to services, and coverage, as well
    as long-term care, is a very large question. I am not going to
    duck it, though. I think that one of the things that we have
    tried to recommend here, recognizing that people have a variety
    of opinions about that issue. Should we mandate, shouldn't we,
    et cetera. Is the idea of putting down on the table strong
    incentives to grow the market, to expand the pool, as a first
    step. To look at the successfulness of that, to be able to
    think of Medicaid as a safety net for individuals who have low
    income, to encourage the middle class. Folks who have
    significant resources will always prepare for themselves, and
    we don't need to worry as much about them. But it is the middle
    class. So, we think that that would be an operative and
    effective first round strategy, because we think that there is
    a great deal of support, recognizing the bipartisan nature of
    support for the legislative proposals. It could move forward.
    It could be a very significant, productive thing.
        Mr. Shimkus. And Mr. Chairman, I kind of threw that out
    there. My time is out. However you want to manage this. I will
    leave it to your call. Thank you, Mr. Chairman.
        Mr. Deal. We probably are going to be up against another
    vote here in a minute. Let me go to Mr. Rogers, and get his
    questions. If we have time, we will come back.
        Mr. Rogers. Thank you, Mr. Chairman. Mr. Krooks, I just--
    according to two elder law attorneys in Seattle, their average
    Medicaid planning client owns a home free and clear worth
    between $250,000 and $400,000, has another $150,000 to $200,000
    in liquid assets, and an income of around $20,000 to $25,000 a
    year. Is that about right from your experience, or would you
    put that high or low, or average?
        Mr. Krooks. It is probably slightly on the high side
    nationwide. I mean, it is geographical. In New York, the homes
    are probably more, or California. But I would say nationwide,
    it is probably slightly on the high side.
        Mr. Rogers. And I just want another quote, if I can. So if
    there are any--if there is--so is there, excuse me, any
    practical way to juggle assets to qualify for Medicaid before
    losing everything? The answer is yes. By following these tips
    on these pages, an older person or couple can save most or all
    of their savings, despite our lawmakers' best efforts. Doesn't
    seem like an honorable business to me to circumvent the system
    designed to take care of those who are most in need. I mean, is
    this a problem nationwide?
        Mr. Krooks. No. I think, you know, in the legal business,
    the Supreme Court has ruled that lawyers are allowed to
    advertise. And I think what you are seeing is the price that
    society pays when a few bad apples spoil the bunch. I can tell
    you that the approach that our firm and that the majority of
    elder law attorneys take is vastly different from the attorney
    whose quote you just read. We help clients deal with legal
    issues of aging. The Terri Schiavo case, I can't tell you how
    many cases we get involved in where we are helping clients work
    through end of life issues, advance directives.
        Mr. Rogers. But you also do Medicaid planning.
        Mr. Krooks. Yes, we do. Yes, we do, and our average
    Medicaid client is on a fixed income, is living off Social
    Security and pension. People with money don't want to give it
    away. Seniors are--want to control their own destiny. They are
    not about to give away money. It is just not reality, and I
    think the reason why we don't have any data on it is because,
    frankly, it just doesn't exist.
        Mr. Rogers. So the laws are complicated enough to allow
    lawyers to quite frankly earn a living helping people navigate
    through Medicaid. Is that correct?
        Mr. Krooks. Not dissimilar from estate planning or tax law.
    That is correct.
        Mr. Rogers. Well, that at least tells us where we have to
    go, I think. Ms. Hansen, I just--a quick one. I was kind of
    struck by something in your written testimony. You offer long-
    term care insurance through AARP? In your testimony, it said,
    and I quote ``Long-term care insurance is limited and generally
    expensive.'' Are you promoting your long-term insurance by
    telling your customers it is limited and too expensive?
        Ms. Hansen. Well, I think our point is our subsidiary does
    offer, through a contract, a long-term care insurance. I think
    our point is that only about 20 percent of seniors, or people
    over 65, oftentimes have the disposable income to purchase
    long-term care insurance, so I think we are stating just a fact
    that many people are not in a financial position to purchase
    it, and so----
        Mr. Rogers. I am sorry. What was that percentage again that
    you said was eligible? I just----
        Ms. Hansen. About 20 percent of the people who are 65 and
    older, because you have to have enough discretionary income to
    pay for that kind of premium.
        Mr. Rogers. And what is your target group for getting
    people into your insurance premiums, your insurance package on
    long-term care?
        Ms. Hansen. I think the general target group would be
    similar to any of the eight major groups that are selling long-
    term care insurance, and these people probably would normally
    have at least a $35,000 income level in order to have some
    discretionary income to do that.
        Mr. Rogers. So do you think tax incentives would help that
    particular group, in fact, encourage them to buy insurance?
        Ms. Hansen. I think it is one of the options to take a look
    at at this point. I think one of the things that we are saying
    is that, in the spirit of looking at this broadly, there is not
    one single solution or one factor alone, and so, if these are
    brought up as topics of possible consideration, we would just
    like to have that conversation with you.
        Mr. Rogers. And Dr. Feder, you said something that struck
    me as well, is that--in your mind, that these tax incentives
    incentivize the wrong group of people to buy insurance. Is
    $35,000 a lot of money?
        Ms. Feder. What I am concerned about is that the people--
    for people, $35,000, it is still, if you talk about a premium,
    say $3,000 a year, you are talking about 10 percent of their
    income. If you lower that a little bit, it is still a lot of
    money for those folks. I suspect that the people who are most
    likely to take advantage of a tax credit are going to be those
    who were likely to buy anyway. We know that. That is true of
    tax credits in other areas. It simply substitutes this new
    public expenditure for private expenditures that would have
    been made anyway, which is exactly the opposite of what you are
    trying to do.
        Mr. Rogers. Thank you. Do you agree with that, Ms. Ignagni?
    I----
        Ms. Ignagni. I think the market is being held back, because
    middle class people don't have the existence of subsidies. If
    you think about a $40,000 per year individual, they would have
    to spend $3,000 before they could deduct anything from there.
    And if you look at the tables that we have supplied, in terms
    of the cost of insurance, you can see that that goes, the
    expenditures for even someone at the 65 year level could be
    under that. So, I think that they wouldn't get any credit for
    that purchase, and I think psychologically, that is a very
    significant barrier. We agree with Dr. Feder that the Medicaid
    system itself should be at a strong safety net for individuals
    at the lowest part of the economic distribution. But we
    definitely think that the lack of tax support is a significant
    barrier for the middle class. And we see this in the surveys
    repeatedly, particularly with respect to people who have the
    opportunity to use flexible benefit dollars, would like to have
    the opportunity and cannot, and that is a very good place to
    shine a spotlight on what the behavior is likely to be.
        Mr. Rogers. Sure one thing I can tell you, Mr. Chairman. I
    think I can see the problem. You have the hardest job up here,
    I think, trying to sell insurance when there are whole groups
    and institutions out there saying don't buy insurance, we are
    going to promote the government to do it, and if you can't do
    that, go see a lawyer, he will get you around the rules anyway.
    It has got to be a tough--I can see where we need to come
    together on some consensus here, so that we are all promoting--
    I happen to be a free market guy, that promotes the purchase of
    that insurance, versus this kind of really dysfunctional family
    in the long-term care, of which we are equal members of that,
    by the way. I thank you all for what you do, and thanks for
    all, for being here. Thank you, Mr. Chairman. I yield back.
        Mr. Deal. The gentleman's time has expired. Welcome, Mr.
    Engel. These folks have been here since 10 waiting for your
    questions if you have any.
        Mr. Engel. Well, Mr. Chairman, was it 10 last night, or 10
    this morning?
        Mr. Deal. Well, I can assure you that those of us who have
    been here can tell you it was 10 this morning.
        Mr. Engel. Okay. Well, I just have a couple of questions,
    and I am just--I will try not to keep them much longer, but I
    understand there has been some discussion about people who are
    supposedly divesting their assets to qualify for Medicaid, and
    I would like to ask Ms. Allen, that the GAO has done some past
    work in this area. I would like you to please tell me what you
    found. Some estate planners are saying that the wealthy are
    divesting themselves in order to qualify, and I wonder what GAO
    has found.
        Ms. Allen. Yes, sir. The last time we looked at this was in
    1997. We had a very short timeframe, so we scurried to gather
    together the most available information at the time. What we
    were asked to do was to look at the prevalence of asset
    transfers with intent to qualify for Medicaid. We found just a
    few limited scope studies, but what we did find was that in a
    couple of States, we found case studies where approximately 13
    to 22 percent of individuals who applied for nursing homes had
    transferred some assets, but many times, it wasn't enough to
    even cover 1 month of care, and in most cases, was insufficient
    to cover 1 year of care. A little earlier than that, in 1993,
    we did some empirical work ourselves. We went to one State,
    drew a random sample of about 400 cases of persons who had
    entered into nursing homes. We found of those approximately 400
    cases, about half had transferred some assets, but the amounts
    were relatively small, and even half of those who had
    transferred assets, this particular State denied them Medicaid
    eligibility, because what they had done was not consistent with
    State and Federal law and regulation.
        At the current time, we have work in process on this issue.
    Some members of this committee have asked us to undertake work
    to look at the prevalence of asset transfers to qualify for
    Medicaid, and we are hoping to have some information available
    in the next few months.
        Mr. Engel. Dr. Feder, I am wondering if you could comment
    on the same thing. Have you seen any evidence?
        Ms. Feder. That is--I am delighted that you asked about the
    GAO study, because I was going to cite it as well. I think that
    there is very little analysis that zeroes in, actually, on the
    asset transfers, and I think that Ms. Allen has articulated
    well that the evidence that exists shows that it is very rare
    and very modest. The broader research on this field looks at
    the resources that people have available, and the way in which
    they are using those resources. And the bulk of that literature
    indicates that people are actually saving more money that you
    would expect them to as they approach long-term care needs.
    They are not spending down at the rates expected. They are
    doing less. And that they are not transferring substantial
    assets. Although everybody is concerned about this advertising,
    when you actually look at behavior, we find that it is modest
    indeed.
        Mr. Engel. Well, thank you, Mr. Chairman. I ask unanimous
    consent to include in the record this GAO study, where GAO
    notes that in their study of one State, the average amount of
    assets converted was $5,618. In almost all cases, for burial
    expenses only.
        Mr. Krooks, would you like to add anything?
        Mr. Krooks. Sure. I think we are losing sight of two very
    important points here. I think we all agree that insurance
    needs to play a larger role in the overall solution. However, I
    have not heard one credible idea about how are we going to take
    care of the people who are uninsurable. I have heard an idea
    about well, we need to define a line based on how much income
    you make as to whether or not you can afford insurance. But
    what about the people who are not insurable? I also think that
    this myth about people transferring these assets, we need to
    either prove that or move on off of it. Because middle class
    America does not wake up each morning and say, you know
    something, I am going to go to my local elder law attorney
    today and I am going to figure out how to qualify for Medicaid.
    Even clients with $150,000, those are married people, so would
    this Congress have the community spouse, the wife, spend all of
    their money taking care of her husband in the nursing home, who
    is going to stay there for an average of two and a half years,
    spend the $150,000, and then, she becomes a public charge on
    welfare. I am not sure that that is the type of social policy
    we want to endorse.
        Mr. Engel. Thank you. Mr. Chairman, I have one question I
    would like to see if I can get in. I would like to go back to
    Dr. Feder, and I am wondering if you can talk to us about your
    concerns with long-term insurance. I recently had someone come
    to sell me and my wife long-term insurance. I understand Ms.
    Ignagni has testified to the benefits of long-term care
    insurance. We weren't sure it was really appropriate for us. I
    am wondering if you could help us with what population do you
    feel it is really appropriate for, and what kind of consumer
    protections are necessary, if someone is serious about buying
    the policy?
        Ms. Feder. I think that it is appropriate for, with
    appropriate consumer protections, for people who are able to
    pay well, long into the future, the premiums that it will
    require, and I think that is a substantially upscale
    population, higher income population. Because one of the things
    that happens to people is that even if they start out buying
    those policies, they buy--and they are encouraged to buy them
    years in advance. If they buy a policy, say, a median income
    couple, this is whom I think it is not appropriate for, a
    couple at age 60, it is going to take 10 percent of their
    income. That is too much. So, say, a 50 year old couple can
    buy, can--wants to make that investment. They are likely to be
    paying premiums for the next 20, 30 years before they need
    long-term care insurance. They also, at the same time, have to
    save for retirement. We know that that age cohort has put away
    much too little for retirement, for basic income needs of
    retirement. So, it is quite possible somewhere in that period,
    they would find themselves needing their resources to live on,
    rather than to pay their insurance premiums. Without
    protections on non-forfeiture, inflation protection, a whole
    array of consumer protections, they would find that they had
    paid years of premiums, and when the need came along, they
    would get nothing.
        We can do a lot with consumer education, so that only
    people with substantial resources, less risk of falling into
    that trap, are likely to buy these policies. Even they may find
    they get less out of them than they had hoped, but affluent
    people, and I would include myself, we can prepare to take
    those risks. Modest and lower income people are not the
    appropriate target population for this benefit. And I would
    again repeat that when we are talking about using what is
    continually described as limited tax dollars, this is not the
    first order of business. The first order of business is to
    sustain and improve the Medicaid safety net, which is--useful
    and important as it is, is grossly inadequate today for the
    population who needs long-term care, and only becoming more so.
    That is where our attention needs to go.
        Thank you.
        Mr. Engel. Thank you. Thank you, Mr. Chairman.
        Ms. Deal. The gentleman's time has expired. We are going to
    take a real quick second go around here. I don't want to detain
    you all too much longer. But I had a couple of questions, and I
    know Mr. Shimkus, I think, maybe had a followup as well. You
    know, we can have differences of opinion about a lot of things,
    as we have here today, but my staff has just provided me with
    this little tidbit of information. If we want to know whether
    or not asset transfers and planning to become Medicaid eligible
    is happening out there, some would deny it. I am told that on
    Google, there are 2,140,000 websites, that on Yahoo, there is
    1,780,000 websites dealing with that issue. Now, I would
    suggest that if you want to follow the money, and find out
    where the issue is, you find out where people are advertising
    and what they are doing it for. They are not doing it just for
    their own enjoyment or their own health. There is transfer
    going on. We can debate that all day long. But let me ask you
    something, back to my concept of what can we agree on?
        I think one thing we probably can all agree on is that the
    current system of reducing you to absolute poverty, assuming
    you have taken advantage of the transfers or whatever to get
    there, that that is demeaning. Would everybody pretty much
    agree with that? If you do, then, and if we are dealing with
    this home, for example, that can be of unlimited value, and is
    excluded from the picture, furnishings, including expensive
    paintings we have all heard about, that are excluded from the
    calculations of your eligibility, what would we come to, in
    terms of establishing a reasonable level of assets that you
    could retain, and I think retain your dignity in the process,
    and still become eligible? Would it be a number that is
    equivalent of, say, the average cost of a home in this country?
    And if we choose that, should we then say that homes that are
    valued in excess of that amount would not be excludable, or
    furnishings of a certain level, that are valued above a certain
    amount, would not be excludable? What about those things? Can
    we agree on things like that?
        Mr. Krooks. No, Mr. Chairman. That is--with all due
    respect, not a good idea.
        Mr. Deal. Why?
        Mr. Krooks. The home is sacrosanct. We are encouraging
    people, through the use of----
        Mr. Deal. Yeah, but you are willing to take their home away
    from them after they have passed on, you are willing for the
    government to come seize it.
        Mr. Krooks. The government.
        Mr. Deal. Everybody over here voted for that in 1992, with
    President Clinton's first budget. Asset recovery.
        Mr. Krooks. That is correct.
        Mr. Deal. Okay.
        Mr. Krooks. But to force a sale of a home, I believe there
    is a distinct difference between forcing a sale of a home while
    somebody is alive, and then, having a State recovery action
    after they pass away. We can't have policy in this country
    encouraging people to buy homes, and then say well, if you
    happen to have the wrong disease, then we are going to make you
    sell it. I also want to just take a chance, this opportunity,
    to respond to the Internet issue. I think that if your staff
    takes a closer look, and I am not sure what term they put in
    Medicaid planning, or elder law planning, whatever, many of
    those hits are actually long-term care insurance sales brokers,
    so----
        Mr. Deal. I thought nobody was interested in that.
        Mr. Krooks. No question about it. So--but I don't--I got
    the sense here that we were coming to the conclusion of----
        Mr. Deal. Okay. So you don't agree on setting any limit for
    a residence.
        Mr. Krooks. Not on the home, no. Not on the home.
        Mr. Deal. The multimillion dollar mansion ought to still be
    able to sit there, and not be touched, and a little old lady
    who has got two children and she is a single mom paying her
    taxes ought to pay for the multimillionaire's house sitting out
    there.
        Mr. Krooks. But it is not a multimillionaire's house. It is
    a house they bought for $20,000 or $50,000----
        Mr. Deal. No, he could pay a million dollars for it and
    still be excludable.
        Ms. Feder. Mr. Deal, the--what I think you are--what you
    spoke about a minute ago, in terms of estate recovery, what you
    get, you can get this money after the fact. It is there, so you
    can--if you are serious about that----
        Mr. Deal. Nobody is serious about that. My State just
    finally got around to it this year of passing something to
    implement the 1992 statute.
        Ms. Feder. Well, you know, I think that is really
    interesting. If the State is not interested in it, because it
    is because the people in your State don't want you to do it, in
    which case----
        Mr. Deal. I agree with that.
        Ms. Feder. Well, then, if that is the case, what we really
    ought to be doing is saying to people in your State and in all
    States, if you want to rely on this program, rely on a public
    program, then we need to all contribute from all our resources,
    all our estates, to pay for that.
        Mr. Deal. Okay.
        Ms. Feder. Maybe that is what people are telling you.
        Mr. Deal. Let me take you to task with your analogy about
    that you don't agree that we ought to spend any tax incentives
    to incentivize purchase of long-range--long-term health care
    insurance, that you are better off spending that money that we
    realize by those tax dollars, by putting money into the current
    system. If you use that analogy, then you would do away with
    the deductibility of the home mortgage, and you would say we
    shouldn't be giving taxpayers a break on home mortgages. We
    should use that tax money to put more people into public
    housing, and spend the money there. We shouldn't allow them to
    have charitable deductions. We are losing tax dollars by
    recognizing a charitable deduction, and we ought to just let
    the government take care of them, instead of what the charities
    are doing.
        Ms. Feder. Well, actually, Mr. Deal, no, I think there is
    both legitimacy and questions about the point you make. The--in
    terms of the discussion here today, we are talking about, I
    have heard several people talk about having difficulty
    sustaining the Medicaid program that we now have. And what I am
    objecting to in regard to using tax dollars that are likely to
    go to higher income people is that if we don't have money,
    enough resources, if you think we don't have the tax dollars to
    support the population in greatest need, then I do not see how
    you can invest more money in, invest the next dollar in higher
    income people instead of the population in greatest need who
    are now being cutoff Medicaid. That is the first thing.
        Mr. Deal. Okay.
        Ms. Feder. The second thing is, I think you are--I think
    there are, in looking at the comparison to mortgage deductions,
    pension deductions, health insurance deductions, those--all of
    those deductions are absolutely entitlements that are now in
    law, that go disproportionately to the better off members of
    our society.
        Mr. Deal. So, you would repeal those, then.
        Ms. Feder. I would not repeal them. I would recognize----
        Mr. Deal. We are going to have a whole lot of middle income
    folks upset with that answer.
        Ms. Feder. I would--I know that. I would recognize that
    they exist, and that we are devoting resources there, and at
    the same time, we ought to be willing to take advantage of
    those who are less fortunate and not able to take advantage----
        Mr. Deal. Doctor, with that, I am going to close with this,
    and challenge you. All I have heard you do is criticize other
    people's suggestions about what to do. Would you submit
    something in writing to us as to the kind of things, other than
    just putting more money into a system that almost every
    Governor says is failing, and is leading to their bankruptcy?
    Would you give us something in writing, positive things you
    think we can do?
        Ms. Feder. I would be delighted, but if you constrain me to
    not use more resources, I cannot do my job.
        Mr. Deal. Use your imagination. Mr. Shimkus.
        Mr. Shimkus. Mr. Chairman, Mr. Strickland came back. And--
    --
        Mr. Deal. Oh, I am sorry. Excuse me, overlooked you. We
    have been talking about you while you were gone. I recognize
    you, we are going to go around one more time.
        Mr. Strickland. Well, I can always trust Mr. Shimkus to
    look out for my wellbeing. Thank you. Thank you, John. Ms.
    Hansen, a question directed toward you. Some of us have
    suggested that requiring individuals to tap into their home
    equity before they can access Medicaid coverage for long-term
    care, some have suggested that that be done. I understand that
    AARP does not support that idea, and could you please describe
    some of the potential dangers of doing that? For example, isn't
    it possible that requiring a reverse mortgage could mean that
    Medicaid would actually wind up spending more on care for some
    individuals, because the bank, not the State, would be the one
    to recover against the home, and thus, the State would not be
    able to recover the costs it spent on care, or another concern
    I have is that much of the home equity goes to pay lender's
    fees and interest, and other associated mortgage costs, rather
    than to pay for the actual care of the patient. Would you just
    comment on that, please?
        Ms. Hansen. Well, Mr. Strickland----
        Mr. Strickland. And then, I would like for Dr. Feder to
    also comment.
        Ms. Hansen. Yeah. I think, actually, the answer I would
    have given is the comment you have made. In other words, the
    first money is already taken away by the fees, the upfront
    fees, in order to pay for the home equity mortgage, or reverse
    mortgage, that that is the first fee that goes. And when that
    is gone, and they--what happens is Medicaid does not even have
    that in order to recover. So, I think that the ability to make
    sure that there are the funds there for the person to use, and
    I think the suggestion was if it is to be used, we just still
    would like to make sure that the choice for services and all
    versus long-term care insurance, but we are concerned about the
    upfront costs, which is why we would suggest, in order to
    encourage this, or see that this is a viable option, is to
    really take a look at some pilots on the process.
        Mr. Strickland. Okay. Dr. Feder.
        Ms. Feder. I would only reinforce what Ms. Hansen has said,
    and take it just the point further, which is that people, in
    looking for ways to find some kind of money some place else, or
    ignoring what really is the reality, which is that we need
    support for the public system that we have got.
        Mr. Strickland. Thank you, and my second question. Dr.
    Feder, I have a document from the National Association of
    Health Underwriters that includes some interesting information
    and statistics on the long-term care partnership program as of
    October 2003. For example, in California, there were 67,500
    applications for partnership policies. However, 11,897 were
    denied. In New York, 65,987 applications were received, and
    10,595 were denied. Approximately one out of every six
    applicants were denied. Now, a number of witnesses today have
    said that we should do more to force people to purchase long-
    term care insurance. However, given the statistics that I have
    shared with you, isn't it true that there are a whole range of
    individuals who can't even get such coverage if they tried?
        Would you please comment on these statistics and this
    problem?
        Ms. Feder. Well, I think--I can't speak to the specific
    statistics about the partnership, but the broader question you
    raise, about people being unable to get coverage, I actually
    thought that was what Mr. Shimkus was asking earlier, when he
    spoke to Ms. Ignagni about people who have long-term care needs
    and disabilities, whether indeed they have access to long-term
    care insurance. They don't. That is because there is always a
    concern among private insurers, understandable, that if people
    who need the services are the ones who buy it, it means they
    have got to have more money to support those claims. That hikes
    the premiums. It means fewer healthy people buy. Insurance
    can't work that way. So it is understandable that people are
    kept out of that private insurance market. But what it means is
    that people who now need long-term care, old or young, cannot
    buy this coverage, and that is as true of the Federal employees
    long-term care benefit as it is of the rest of the industry.
    So, given that the--our long-term care protection is inadequate
    now, for younger and older Americans, to wait decades for a
    solution that will only do a partial job seems to me a highly
    questionable way to approach this problem.
        Thank you.
        Mr. Strickland. I thank you both for your answers, and Mr.
    Chairman, I yield back my 35 seconds.
        Mr. Deal. You are generous. I thank the gentleman. Mr.
    Shimkus.
        Mr. Shimkus. Thank you, Mr. Chairman. Again, I am very
    pleased with this hearing, and I appreciate your patience. This
    is, as you can see, it is a tough issue, and we are grappling
    with is, and trying to wrestle with these concerns. . And we
    all have real life stories, as people said before. My
    grandmother suffered dementia. We actually sold her house to
    pay for 3 years of long-term care, and then Medicaid picked up
    the final seven. I think--and it was good. It was good that we
    paid for--or 3 years was paid for, and it was good that
    Medicaid was there to cover her.
        My parents live in the home that my grandfather built. But
    that is not the story for all seniors. A couple issues in this
    debate, is I don't know how to define wealth in America any
    more. What is affluent, what is modest, and what is low? In
    low, we use the poverty level, or 125 percent of poverty, 150
    percent of poverty. But what is modest? And that was the
    question about $35,000 a year. In parts of my district, that is
    above the average income of my Congressional district. So that
    would be considered well off, middle class, upper middle class.
    So I think when we start to talking about incomes, we ought to
    start putting real dollars down, and I think that would help us
    all.
        Mr. Krooks, in your line of work, do you--there is an issue
    about the--in fact, I don't know if it has been quoted today,
    the editorial in the Wall Street Journal. Two clients, or
    people that you deal with, are you involved in this stuff
    called asset shifting or buying up?
        Mr. Krooks. I am aware of the Wall Street Journal
    editorial, Congressman. The asset shifting or buying up, I
    don't know what that means.
        Mr. Shimkus. Well, I will tell you what it means. It would
    mean that my parents, instead of living in a home that my
    grandfather built, upon getting a certain age, they end up
    buying a $250,000 home. In this, you know, what I am trying to
    do is address this debate of this--how sacred a home is.
        Mr. Krooks. Okay.
        Mr. Shimkus. Now, I will tell you that my--the home that
    they live in has no garage. It is a very sacred home for them.
    My mother has said she will be carried out of it. And so I
    appreciate the comments of how sacred that home is. However, if
    my folks were getting good legal counsel from the National
    Association of, what are these NAELA guys? National Association
    of Elder Legal Attorneys, and they said get a two car garage.
    Buy one that is $250,000, the terminology is buy up, the house
    is sacred. We are not going to go after that, and you hide your
    assets, because now, you are paying, you have a mortgage, or it
    is no longer a full asset of your own.
        Mr. Krooks. Okay. May I respond?
        Mr. Shimkus. Please.
        Mr. Krooks. Okay. First of all, Medicaid is like the drive
    through. Either you pay on the way in, or you pay on the way
    out. So----
        Mr. Shimkus. But we--I think--in the--but we have come to
    the conclusion that if 82 percent of seniors own homes, and
    then, when they qualify for Medicare, 14 percent actually
    identify a home as an asset, where is the other 60 percent
    going? So I think part of this hearing has accepted the premise
    that no, it is not, because States aren't collecting at the
    end.
        Mr. Krooks. Okay. In my experience, I have never had a
    client buy up. What I have had is clients who will spend money
    on their homes to make them handicap accessible, to put in an
    elevator, or handicap ramp, or handicap bathroom. I have had
    clients do that. I have been practicing law for 20 years, and I
    am, frankly, I am not aware of any of my colleagues, I am not
    saying that nobody does it, I just don't know of anyone who
    engages in that type of advice. In terms of the estate
    recovery, I think that I would disagree that people are
    transferring their homes.
        Seniors want to die in their homes. I think we have common
    ground that. To give away the house, and then run the risk that
    the children are going to kick you out 1 day, or that you are
    going to subject your estate to gift or capital gains taxes
    just doesn't make sense. So, I don't know why the States aren't
    recovering, and I don't know what is happening to the homes,
    but our clients are not giving away their houses. Where are
    they going to live?
        Mr. Shimkus. Are you providing, and I don't want to give
    you any, I mean, private consultations or stuff, but do you in
    the practice, and I think most people understand, making sure
    the spouse is able to keep the home, but what about heirs,
    children?
        Mr. Krooks. Well, there are certain protections in the law.
    Let us say you have a child who has lived at home, taken care
    of the parent, provided care to that parent, that kept the
    parent out of a nursing home, to save the Federal Government
    and the State's money, then there is a protection in the law
    that allows the parent to pass on that asset or that house to
    the child. It is called the caretaker child. I think again,
    that is good policy. We want children to take care of their
    parents. Other than that, if a parent transfers a house to a
    child, they are not going to be eligible to receive Medicaid in
    a nursing home for 3 years. So either they are going to pay for
    those 3 years out of pocket, or they are not going to get care.
    There is no other way around it.
        Mr. Shimkus. Thank you, Mr. Chairman. I--even though there
    are some contentious periods, this is a very important debate,
    and I think--everyone ought to be encouraged to keep coming
    back to committee members, talking through this, and hopefully,
    trying to find some common ground. I would encourage that.
        Thank you, Mr. Chairman.
        Mr. Deal. Thank you. Ms. Myrick.
        Ms. Myrick. No, I am sorry. I had to be gone. So I did not
    hear your testimony per se. I do want to thank you for what you
    have done by coming here, and I will get copies of what you
    said, so I can find out.
        Mr. Deal. I thank the gentlelady.
        Well, you thought you were just going to come testify. This
    is an endurance contest up here, as you found out. You have all
    been great. I know that there were things that you would have
    liked to have said that you didn't get a chance to say. We
    would be glad for you to contact us and provide us with
    whatever else you would like to say.
        It is a difficult subject, one that I appreciate the fact
    that all of you have weighed in on and taken the time to do it.
    And this committee especially appreciates your presence here
    today.
        Thank you. The committee is adjourned.
        [Whereupon, at 5:20 p.m., the subcommittee was adjourned.]
        [Additional material submitted for the record follows:]

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