[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.
      
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    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.
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    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.
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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:
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    \3\ LifePlans, Inc., Benefits of Long-Term Care Insurance, 
September 2002
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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.
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    \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.
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    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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