Long-Term Care Financing: Growing Demand and Cost of Services Are
Straining Federal and State Budgets (27-APR-05, GAO-05-564T).	 
                                                                 
Long-term care relies heavily on financing by public payers,	 
especially Medicaid, and has significant implications for state  
budgets as well as the federal budget. It includes an array of	 
health, personal care, and supportive services provided to	 
persons with physical or mental disabilities. As the baby boom	 
generation ages, the number of elderly with disabilities will	 
greatly expand the demand for long-term care services and will	 
impose greater burdens on federal and state budgets. GAO was	 
asked to discuss the budgetary and other challenges resulting	 
from the anticipated increase in demand for long-term care	 
services. This testimony addresses (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. The	 
testimony also highlights several considerations for any possible
reforms of long-term care financing. This testimony updates prior
GAO work, particularly Long-Term Care: Aging Baby Boom Generation
Will Increase Demand and Burden on Federal and State Budgets,	 
GAO-02-544T (Washington, D.C.: March 21, 2002). 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-564T					        
    ACCNO:   A22799						        
  TITLE:     Long-Term Care Financing: Growing Demand and Cost of     
Services Are Straining Federal and State Budgets		 
     DATE:   04/27/2005 
  SUBJECT:   Aid for the disabled				 
	     Aid for the elderly				 
	     Elder care 					 
	     Elderly persons					 
	     Entitlement programs				 
	     Entitlements					 
	     Federal aid programs				 
	     Future budget projections				 
	     Health care programs				 
	     Long-term care					 
	     Medicaid						 
	     Medicare						 
	     Persons with disabilities				 
	     State budgets					 
	     Baby boomers					 
	     Social Security Program				 

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GAO-05-564T

Testimony

Before the Subcommittee on Health, Committee on Energy and Commerce, House
of Representatives

United States Government Accountability Office

GAO

For Release on Delivery Expected at 10:00 a.m. EDT

Wednesday, April 27, 2005

LONG-TERM CARE FINANCING

Growing Demand and Cost of Services Are Straining Federal and State
Budgets

Statement of Kathryn G. Allen

Director, Health Care-Medicaid

and Private Health Insurance Issues

GAO-05-564T

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?"

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.

1GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government, GAO-05-325SP (Washington, D.C.: February 2005).

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.

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.

2GAO, Long-Term Care: Aging Baby Boom Generation Will Increase Demand and
Burden on Federal and State Budgets, GAO-02-544T (Washington, D.C.: March
21, 2002).

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:

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

           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.

           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.

           Figure 1: Funding Sources for Long-Term Care, 2003

           Notes: Amounts do not include unpaid care provided by family
           members or other informal caregivers. Percentages do not add to
           100 percent due to rounding.

           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.

           Other significant long-term care financing sources include:

           o  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.

           o  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.

           o  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.

           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.

           Figure 2: Federal Spending for Medicaid, Medicare, and Social
           Security as a Percentage of GDP, 2000 through 2080

           Notes: Medicaid spending includes federal, but not state,
           expenditures.

           Social Security and Medicare projections based on the intermediate
           assumptions of the 2005 Trustees' Reports. Medicaid projections
           based on the Congressional Budget Office's (CBO) January 2005
           short-term Medicaid estimates and the CBO's December 2003
           long-term Medicaid projections under midrange assumptions.

           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.)

           Figure 3: Composition of Federal Spending as a Share of GDP
           Assuming Discretionary Spending Grows with GDP after 2004 and All
           Expiring Tax Provisions Are Extended

           Notes: Although the revenue projections assume that expiring tax
           provisions are extended, federal revenue as a share of GDP
           increases through 2015 due to (1) taxpayers paying higher marginal
           tax rates as the economy grows (referred to as "real bracket
           creep"), (2) more taxpayers becoming subject to the alternative
           minimum tax, and (3) increased revenue from tax-deferred
           retirement accounts. After 2015, the analysis assumes that revenue
           as a share of GDP is held constant. For additional information on
           our budget simulations, see GAO, Our Nation's Fiscal Outlook: The
           Federal Government's Long-Term Budget Imbalance, at
           http://www.gao.gov/special.pubs/longterm/longterm.html.

           Beginning about 2010, the share of the population that is age 65
           or older will begin to climb, with profound implications for our
           society, our economy, and the financial condition of these
           entitlement programs. In particular, both Social Security and the
           Hospital Insurance portion of Medicare are largely financed as
           pay-as-you-go systems in which current workers' payroll taxes pay
           current retirees' benefits. Therefore, these programs are directly
           affected by the relative size of populations of covered workers
           and beneficiaries. Historically, this relationship has been
           favorable. In the near future, however, the overall
           worker-to-retiree ratio will change in ways that threaten the
           financial solvency and sustainability of these entitlement
           programs. In 2000, there were 4.8 working-age persons (20 to 64
           years) per elderly person, but by 2030, this ratio is projected to
           decline to 2.9.9 This decline in the overall worker-to-retiree
           ratio will be due to both the surge in retirees brought about by
           the aging baby boom generation as well as falling fertility rates,
           which translate into relatively fewer workers in the near future.

           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.

           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.

           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).

           Figure 4: Elderly Population, 2000 through 2040

           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.

           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.

           Figure 5: Long-Term Care Expenditures for the Elderly, 2000
           through 2050

           aCBO did not separately report spending by Medicaid or any other
           financing source as a portion of the total estimated long-term
           care expenditures for the elderly for years later than 2020.

           bASPE/Lewin did not report separate estimates for different
           assumptions about the role of private insurance.

           cProjections are in constant dollars.

           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.

           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.

           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.

           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:

           o  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.

           o  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.

           o  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.

           o  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.

           o  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.

           o  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.

           o  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.

           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.

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                                   Background

3See 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.

4Based 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.

5The 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. S: 1396 d (b) (2000).

6Through 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.

7Private 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

8For 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.

9The 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.

10See CBO, Monthly Budget Review for November 4, 2004, and April 6, 2005.

       Baby Boom Generation Will Greatly Expand Demand for Long-Term Care

    Spending for Long-Term Care for Elderly Anticipated to Increase Sharply

11Judith 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.

13Assistant 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).

14GAO, 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).

             Considerations for Reforming Long-Term Care Financing

15GAO, 21st Century Challenges: Reexamining the Base of the Federal
Government.

16Pub. L. No. 104-191, S:S: 321-327, 110 Stat. 1936, 2054-2067.

                          Contact and Acknowledgments

(290448)

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www.gao.gov/cgi-bin/getrpt?GAO-05-564T.

To view the full product, click on the link above. For more information,
contact Kathryn G. Allen at (202) 512-7118.

Highlights of GAO-05-564T, a testimony before the Subcommittee on Health,
Committee on Energy and Commerce, House of Representatives

April 27, 2005

LONG-TERM CARE FINANCING

Growing Demand and Cost of Services Are Straining Federal and State
Budgets

Long-term care relies heavily on financing by public payers, especially
Medicaid, and has significant implications for state budgets as well as
the federal budget. It includes an array of health, personal care, and
supportive services provided to persons with physical or mental
disabilities. As the baby boom generation ages, the number of elderly with
disabilities will greatly expand the demand for long-term care services
and will impose greater burdens on federal and state budgets.

GAO was asked to discuss the budgetary and other challenges resulting from
the anticipated increase in demand for long-term care services. This
testimony addresses (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. The testimony
also highlights several considerations for any possible reforms of
long-term care financing. This testimony updates prior GAO work,
particularly Long-Term Care: Aging Baby Boom Generation Will Increase
Demand and Burden on Federal and State Budgets, GAO-02-544T (Washington,
D.C.: March 21, 2002).

Over the coming decades, entitlement spending for Medicare, Medicaid, and
Social Security is expected to absorb larger shares of federal revenue and
threatens to crowd out other spending as the baby boom generation enters
retirement age. The increasing demand for long-term care services fueled
in part by the baby boom generation will also further strain federal and
state budgets. Estimates suggest the future number of disabled elderly who
cannot perform basic activities of daily living without assistance may as
much as double from 2000 through 2040, resulting in a large increase in
demand for long-term care services. Spending on long-term care services
just for the elderly is estimated to increase by more than two-and-a-half
times between 2000 and 2040, and could nearly quadruple in constant
dollars between 2000 and 2050 to $379 billion, according to some
estimates. Without fundamental financing changes, Medicaid can be expected
to remain one of the largest funding sources, straining both federal and
state governments.

Financing the increasing demand for long-term care services will be a
significant 21st century challenge for the nation. A key question for
policymakers will be to consider what options exist for rethinking the
federal, state, and private roles in financing long-term care. In
considering options for reforming long-term care financing, GAO notes that
long-term care is not just about health care. It also comprises a variety
of services an aged 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, GAO has identified several
considerations for shaping reform proposals that include:

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