Long-Term Care: Aging Baby Boom Generation Will Increase Demand  
and Burden on Federal and State Budgets (21-MAR-02, GAO-02-544T).
								 
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 
more and more of the baby boom generation enters retirement over 
the coming decades, entitlement spending for Medicare, Medicaid, 
and Social Security is expected to absorb correspondingly larger 
shares of federal revenue and threatens to crowd out other	 
spending. The aging of the baby boomers will also increase the	 
demand for long-term care and contribute further to federal and  
state budget burdens. Estimates suggest the future number of	 
disabled elderly who cannot perform basic activities of daily	 
living without assistance may be double today's level. 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. Long-term care spending from all public 
and private sources, which was about $137 billion for persons of 
all ages in 2000, will increase dramatically in the coming	 
decades as the baby boom generation ages. 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.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-544T					        
    ACCNO:   A02922						        
  TITLE:     Long-Term Care: Aging Baby Boom Generation Will Increase 
Demand and Burden on Federal and State Budgets			 
     DATE:   03/21/2002 
  SUBJECT:   Aid for the elderly				 
	     Elderly persons					 
	     Federal aid programs				 
	     Health care programs				 
	     Program evaluation 				 
	     Entitlements					 
	     Entitlement programs				 
	     Long-term care					 
	     Elder care 					 
	     Future budget projections				 
	     1999 National Long-Term Care Survey		 
	     Medicaid Program					 
	     Medicare Hospital Insurance Trust Fund		 
	     Medicare Program					 
	     Social Security Program				 

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GAO-02-544T
     
Testimony Before the Special Committee on Aging, U. S. Senate United States
General Accounting Office GAO

For Release on Delivery Expected at 9: 30 a. m. Thursday, March 21, 2002
LONG- TERM CARE

Aging Baby Boom Generation Will Increase Demand and Burden on Federal and
State Budgets

Statement of David M. Walker Comptroller General of the United States GAO-
02- 544T

Page 1 GAO- 02- 544T Mr. Chairman and Members of the Committee: I am pleased
to be here today as you discuss the effects of the aging baby

boom generation on the demand for long- term care services and the
challenges that increased demand will bring for federal and state budgets.
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 beginning in less than 10 years from now 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. As I have testified before various committees, Social Security
and Medicare?s Hospital Insurance trust funds will face cash deficits not
long after the first baby boomers are eligible to retire. 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 boom population 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.

In summary, as more and more of the baby boom generation enters retirement
over the coming decades, entitlement spending for Medicare, Medicaid, and
Social Security is expected to absorb correspondingly larger shares of
federal revenue and threatens to crowd out other spending. The aging of the
baby boomers will also increase the demand for long- term

Page 2 GAO- 02- 544T care and contribute further to federal and state budget
burdens. Estimates suggest the future number of disabled elderly who cannot
perform basic

activities of daily living without assistance may be double today?s level.
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 $137 billion for persons of all ages in 2000, will
increase dramatically in the coming decades as the baby boom generation
ages. Spending on long- term care services just for the elderly is projected
to increase at least two- and- a- half times and could nearly quadruple in
constant dollars to $379 billion by 2050, according to some estimates.
Without fundamental financing changes, Medicaid- which pays over onethird 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 any long- term care financing reforms 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.

Page 3 GAO- 02- 544T 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
supervision to avoid harming themselves or others or assistance with tasks
such as taking medications. 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.
Assistance takes place in many forms and settings, including institutional
care in nursing homes or assisted living facilities, home care services, and
unpaid care from family members or other informal caregivers. In 1994,
approximately 64 percent of all elderly with a disability relied exclusively
on unpaid care from family or other informal caregivers; even among elderly
with difficulty with five activities of daily living, about 41 percent

relied entirely on unpaid care. Nationally, spending from all public and
private sources for long- term care for all ages totaled about $137 billion
in 2000, accounting for nearly 12 percent of all health care expenditures. 1
Over 60 percent of expenditures for long- term care services are paid for by
public programs, primarily Medicaid and Medicare. Individuals finance almost
one- fourth of these expenditures out- of- pocket and, less often, private
insurers pay for longterm

care. Moreover, these expenditures do 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.

1 Based on our analysis of data from the Office of the Actuary of the
Centers for Medicare and Medicaid Services and The MEDSTAT Group. These
figures include long- term care for all people, regardless of age. Amounts
do not include expenditures for nursing home and

home health services provided by hospital- based entities, which are counted
generally with other hospital services. Background

Page 4 GAO- 02- 544T Figure 1: Medicaid Is the Largest Funding Source for
Long- Term Care

Note: Amounts do not include unpaid care provided by family member or other
informal caregivers or expenditures for nursing home and home health
services provided by hospital- based entities. Source: GAO analysis of 2000
data from the Centers for Medicare and Medicaid Services and The MEDSTAT
Group. 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 to 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 2000, Medicaid paid 45
percent (about $62 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. 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 in recent years, about 53 to 60 percent of Medicaid long

Medicare Other public Private insurance

Other private Out- of- pocket

Medicaid Percentage

11 4 23

14 3 Public payers 45

Page 5 GAO- 02- 544T term care spending has gone toward the elderly. In
2000, nursing home expenditures dominated Medicaid long- term care
expenditures,

accounting for 57 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 communitybased settings. 2
Expenditures for Medicaid home- and community- based services grew ten- fold
from 1990 to 2000- from $1.2 billion to $12.0 billion.

Other significant long- term care financing sources include:

 Individuals? out- of- pocket payments, the second largest payer of long-
term care services, accounted for 23 percent (about $31 billion) of total
expenditures in 2000. The vast majority (80 percent) of these payments were
used for nursing home care.

 Medicare spending accounted for 14 percent (about $19 billion) of total
long- term care expenditures in 2000. 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, 3 accounted for 11 percent (about $15 billion) of
long- term care expenditures in 2000. Less than 10 percent of the elderly
and an even lower percentage of the near elderly (those aged 55 to 64) have
purchased long- term care insurance, although the number of individuals
purchasing long- term care insurance increased during the

1990s. 2 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. 3 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 personal
functions or activities of daily living- provided in settings other than
acute- care hospital units.

Page 6 GAO- 02- 544T 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 Medicare, Medicaid, and Social Security are
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. Under the 2001 Medicare

trustees? intermediate estimates, Medicare will double as a share of gross
domestic product (GDP) between 2000 and 2035 (from 2.2 percent to 5.0
percent) and reach 8.5 percent of GDP in 2075. The federal share of Medicaid
as a percent of GDP will grow from today?s 1.3 percent to 3.2

percent in 2035 and reach 6.0 percent in 2075. Under the Social Security
trustees? intermediate estimates, Social Security spending will grow as a
share of GDP from 4.2 percent to 6.6 percent between 2000 and 2035, reaching
6.7 percent in 2075. (See fig. 2.) Combined, in 2075 a full one- fifth of
GDP will be devoted to federal spending for these three programs alone.
Absent Reform, Spending for

Medicaid, Medicare, and Social Security Will Put Unsustainable Pressure on
the Federal Budget

Page 7 GAO- 02- 544T Figure 2: Projected Federal Spending for Medicaid,
Medicare, and Social Security Will Double as a Share of GDP by 2035

Note: These estimates do not include the state share of Medicaid.
Projections based on intermediate assumptions of the 2001 Old- Age,
Survivors, and Disability Insurance, Hospital Insurance, and Supplementary
Medical Insurance Trustees? Reports and on the Congressional Budget Office?s
(CBO) January 2002 long- term Medicaid projections. Source: Office of the
Actuary, Centers for Medicare and Medicaid Services; the Office of the Chief
Actuary, Social Security Administration; and CBO. 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 last year?s tax reductions are made permanent,
revenue remains constant thereafter as a share of GDP, and discretionary
spending keeps pace with the economy. Under these conditions, spending for
net interest, Social Security, Medicare, and Medicaid would consume nearly
three- quarters of federal

revenue by 2030. This will leave little room for other federal priorities,
including defense and education. By 2050, total federal revenue would be
insufficient to fund entitlement spending and interest payments. 4 (See fig.
3.)

4 For additional discussion of our long- term simulations, see U. S. General
Accounting Office, Budget Issues: Long- Term Fiscal Challenges, GAO- 02-
467T (Washington, D. C.: February 27, 2002). Social Security

Medicare Medicaid

0 5

10 15

20 25

2000 2010 2020 2030 2040 2050 2060 2075 Percent of GDP

2035

Page 8 GAO- 02- 544T Figure 3: Medicare, Medicaid, Social Security, and Net
Interest Will Put Unsustainable Pressure on the Federal Budget

Source: GAO?s January 2002 analysis. See U. S. General Accounting Office,
Budget Issues: LongTerm Fiscal Challenges, GAO- 02- 467T (Washington, D. C.:
February 27, 2002). 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

2000 2030 2050 Percent of GDP

Social Security Medicare and Medicaid

Net interest All other spending Revenue

0 10

20 30

40

Page 9 GAO- 02- 544T will change in ways that threaten the financial
solvency and sustainability of these entitlement programs. In 2000, there
were 4.9 working- age

persons (18 to 64 years) per elderly person, but by 2030, this ratio is
projected to decline to 2.8. 5 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.

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. Although Medicare cost
growth had slowed in recent years, in fiscal year 2001 Medicare spending

grew by 10.3 percent and is up 7.8 percent for the first 5 months of fiscal
year 2002. 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. Approximately
71 percent of all Medicaid dollars are dedicated to services for the aged,
blind, and disabled individuals, and Medicaid spending is one of the largest
components of most states? budgets. At the February 2002 National

Governors Association meeting, governors reported that during a time of
fiscal crisis for states, the growth in Medicaid is creating a situation in

5 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 2000 was 3. 4. Under the 2001
Trustees? intermediate estimates, this ratio is projected to decline to 2.1
by 2030. For Medicare Hospital Insurance, the ratio was 4.0 in 2001 and was
projected to decline to 2.3 by 2030 under the 2001 Trustees? intermediate
estimates.

Page 10 GAO- 02- 544T which states are faced with either making major cuts
in programs or being forced to raise taxes significantly. Further, in a 2001
survey, 24 states cited increased costs for nursing homes and home- and
community- based

services as among the top factors in Medicaid cost growth. 6 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, such as
the recent economic slowdown. State revenues decline during economic
downturns, while the needs of the disabled for assistance remain constant.

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 34.8 million people- 12.7 percent of our nation?s
total population. By 2020, that percentage will increase by nearly one-
third to 16.5 percent- one in six Americans- and will represent nearly 20
million more elderly than there are today. By 2040, the number of elderly
aged 85 years and older- the age group most likely to need longterm

care services- is projected to more than triple from about 4 million to
about 14 million (see fig. 4).

6 Vernon Smith and Eileen Ellis, ?Medicaid Budgets Under Stress: Survey
Findings for State Fiscal Year 2000, 2001 and 2002,? prepared for The Kaiser
Commission on Medicaid and the Uninsured (Washington, D. C.: The Henry J.
Kaiser Family Foundation, Oct. 2001). Baby Boom Generation Will

Greatly Expand Demand for LongTerm Care

Page 11 GAO- 02- 544T Figure 4: Elderly Population Will More than Double by
2040

Source: Bureau of the Census, ?Projections of the Total Resident Population
by 5- Year Age Groups and Sex With Special Age Categories: Middle Series,?
selected years 2000 to 2040 (Jan. 2000). 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.
For the past two decades, the number of elderly with disabilities has
remained fairly constant while the percentage of those with disabilities has
fallen between 1 and 2 percent a year. 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 to between onethird

and twice current levels, or as high as 12.1 million by 2040.

30.5 47

62.9 4.3 6.8

14.3

0 10

20 30

40 50

60 70

80 90

2000 2020 2040 Number (in millions)

85 and older 65 to 84 years old

Page 12 GAO- 02- 544T The increased number of disabled elderly will
exacerbate current problems in the provision and financing of long- term
care services.

Approximately one in five adults with long- term care needs and living in
the community reports an inability to receive needed care, such as
assistance in toileting or eating, often with adverse consequences. 7 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 $50,000 or more, 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. 8 In addition, geographic dispersion of families may

further reduce the number of unpaid caregivers available to elderly baby
boomers.

Currently, public and private spending on long- term care is about $137
billion for persons of all ages, and for the elderly alone is projected to
increase two- and- a- half to four times in the next 40 to 50 years-
reaching as much as $379 billion in constant dollars for the elderly alone,
according to one source. 9 (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

7 Judith Feder et al., ?Long- Term Care in the United States: An Overview,?
Health Affairs,

May/ June 2000, pp. 40 to 56. 8 ?Aging into the 21st Century,? prepared by
Jacob Siegel for the Administration on Aging, U. S. Department of Health and
Human Services, May 1996.

9 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).
Spending for LongTerm Care for Elderly

Could Nearly Quadruple by 2050

Page 13 GAO- 02- 544T heavily on public payers, particularly Medicaid, which
estimates indicate pays about 36 to 37 percent of long- term care
expenditures for the elderly.

Figure 5: Projected Long- Term Care Expenditures for the Elderly Could
Nearly Quadruple by 2050

a ASPE/ Lewin did not report separate estimates for different assumptions
about the role of private insurance. b Projections are in constant dollars.
Sources: CBO, ?Projections of Expenditures for Long- Term Care Services for
the Elderly? (Washington, D. C.: March 1999) and ASPE/ Lewin, published in
Urban Institute, ?Long- Term Care: Consumers, Providers, and Financing, A
Chart Book,? (Washington, D. C.: March 2001), with additional information
provided by ASPE on projected Medicaid spending. One factor that will affect
spending is how many elderly will need assistance. As I have previously
discussed, 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

Dollars (in billions) b 2000 2000 2020 2025 2050 2040

Non- Medicaid spending, assuming more private insurance

Non- Medicaid spending, assuming same level of private insurance

Non- Medicaid spending Medicaid spending

Medicaid spending

0 50

100 150

200 250

300 350

400 CBO projections ASPE/ Lewin projections a

Total spending, assuming more private insurance Total spending, assuming
same level of private insurance

Page 14 GAO- 02- 544T influencing projected long- term care spending is the
type of care that the baby boom generation will use. Currently, expenditures
for nursing home care greatly exceed those for care provided in other
settings. Average

expenditures per elderly person in a nursing home can be about four times
greater than average expenditures for those receiving paid care at home. 10
The past decade has seen increases in paid home care as well as in

assisted living facilities, a relatively newer and developing type of
housing in which an estimated 400,000 elderly with disabilities resided in
1999. 11 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. 12 Further,
many baby boomers continue to assume they will never need such coverage or
mistakenly believe that Medicare or their own

10 Data from the Medical Expenditure Panel Survey show that the average
annual expenditures for home health care for all elderly individuals was
$6,041 in 1996 compared to average annual expenditures for nursing home care
of $20,116 for those 65 to 69 years and $25,765 for those 90 years and
older. 11 Kenneth 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, May 22, 2001, pp. 6354 to 6359. 12 U. S. General Accounting Office,
Long- Term Care: Baby Boom Generation Increases Challenge of Financing
Needed Services, GAO- 01- 563T (Washington, D. C.: Mar. 27, 2001) and Long-
Term Care Insurance: Better Information Critical to Prospective Purchasers,

GAO/ T- HEHS- 00- 196 (Washington, D. C.: Sept. 13, 2000).

Page 15 GAO- 02- 544T 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.

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 I noted previously, this increasing burden will strain
both federal and state governments.

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. As further
deliberation is given to any long- term care financing reforms, I would like
to close by suggesting several considerations for policymakers to keep in
mind.

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
Considerations for

Reforming Long- Term Care Financing

Page 16 GAO- 02- 544T 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, let me offer
several considerations as you seek to shape effective 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 satisfy 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 satisfied 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, and 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 limits 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 defining a safety net,
it

Page 17 GAO- 02- 544T 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 two important potential roles in encouraging personal
preparedness. The first is to adequately educate people about the boundaries
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. The
second 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 strengthening

the requirements for policies qualifying for favorable tax treatment through
the Health Insurance Portability and Accountability Act of 1996. However,
long- term care insurance is still 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.

 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

Page 18 GAO- 02- 544T 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 states? 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 longterm
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 I
earlier noted, 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 committee may have at
this time.

For future contacts regarding this testimony, please call William J. Scanlon
or Kathryn G. Allen at (202) 512- 7114. Other individuals who made key
contributions include JoAnne R. Bailey, Linda Baker, John E. Dicken, Karen
Doran, Romy Gelb, Rick Krashevski, James McTigue, Jr., and Melissa Wolf.

(290159) Contacts and Acknowledgments
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